[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
                 H.R. 2382, THE CREDIT CARD INTERCHANGE
                  FEES ACT OF 2009; AND H.R. 3639, THE
                       EXPEDITED CARD REFORM FOR
                         CONSUMERS ACT OF 2009

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 8, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-86




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 8, 2009..............................................     1
Appendix:
    October 8, 2009..............................................    53

                               WITNESSES
                       Thursday, October 8, 2009

Bourke, Nick, Manager, Safe Credit Cards Project, The Pew 
  Charitable Trusts..............................................    46
Caverly, Mark, Executive Vice President, Local Government Federal 
  Credit Union, on behalf of the Credit Union National 
  Association (CUNA) and the Electronic Payments Coalition (EPC).    13
Clayton, Kenneth J., Senior Vice President and General Counsel, 
  ABA Card Policy Council, American Bankers Association (ABA)....    41
Demangone, Anthony, Director of Regulatory Compliance/Senior 
  Compliance Counsel, the National Association of Federal Credit 
  Unions (NAFCU).................................................    44
Duncan, Mallory, Senior Vice President and General Counsel, 
  National Retail Federation, on behalf of the Merchants Payments 
  Coalition......................................................    18
Duplessis, Hon. Ann D., Senior Vice President, Liberty Bank and 
  Trust, New Orleans, Louisiana; State Senator, District 2, 
  Louisiana State Senate, on behalf of the Independent Community 
  Bankers of America (ICBA)......................................    16
Evans, David S., Lecturer, University of Chicago Law School......    11
McCracken, Todd, President, National Small Business Association 
  (NSBA).........................................................    42
Mierzwinski, Edmund, Consumer Program Director, U.S. PIRG........    15
Miller, Kathy, Owner/Operator, The Elmore Store, Elmore, Vermont; 
  Board Member, Vermont Grocers' Association.....................     9
Shuster, Hon. Bill, a Representative in Congress from the State 
  of Pennsylvania................................................     1
Susswein, Ruth, Deputy Director, National Priorities, Consumer 
  Action.........................................................    39
Welch, Hon. Peter, a Representative in Congress from the State of 
  Vermont........................................................     3

                                APPENDIX

Prepared statements:
    Waters, Hon. Maxine..........................................    54
    Schuster, Hon. Bill..........................................    57
    Welch, Hon. Peter............................................    58
    Bourke, Nick.................................................    59
    Caverly, Mark................................................   110
    Clayton, Kenneth J...........................................   120
    Demangone, Anthony...........................................   129
    Duncan, Mallory..............................................   144
    Duplessis, Hon. Ann D........................................   180
    Evans, David S...............................................   191
    McCracken, Todd..............................................   194
    Mierzwinski, Edmund..........................................   200
    Miller, Kathy................................................   215
    Susswein, Ruth...............................................   221

              Additional Material Submitted for the Record

Gutierrez, Hon. Luis:
    Written statement of the American Bankers Association (ABA)..   228
    Written statement of Blackhawk Network.......................   240
    Written statement of the Credit Union National Association 
      (CUNA).....................................................   243
    Written statement of the Electronic Transactions Association 
      (ETA)......................................................   245
    Written statement of the Independent Community Bankers of 
      America (ICBA).............................................   251
    Written statement of Congresswoman Betsy Markey..............   254
    Written statement of the National Association of Convenience 
      Stores and the Society of Independent Gasoline Marketers of 
      America....................................................   255
    Written statement of the National Black Chamber of Commerce..   279
Hensarling, Hon. Jeb:
    Written statement of the Financial Services Roundtable.......   280


                 H.R. 2382, THE CREDIT CARD INTERCHANGE
                         FEES ACT OF 2009; AND
                  H.R. 3639, THE EXPEDITED CARD REFORM
                       FOR CONSUMERS ACT OF 2009

                              ----------                              


                       Thursday, October 8, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Gutierrez, 
Velazquez, Watt, Sherman, Meeks, Moore of Kansas, Baca, Miller 
of North Carolina, Scott, Green, Cleaver, Klein, Wilson, 
Perlmutter, Carson, Speier, Minnick, Adler, Kosmas; Bachus, 
Castle, Royce, Capito, Hensarling, Barrett, Marchant, Posey, 
Jenkins, Lee, Paulsen, and Lance.
    The Chairman. The hearing will come to order. Before we 
make our opening statements, if there is no objection, we have 
two colleagues here. We all know what the schedule is like, so 
if there is no objection, I will go right to our two 
colleagues. And after they made their statements, we will get 
to our opening statements.
    We have before us two pieces of legislation. One is a bill 
to move up the effective date of the credit card bill that the 
House passed. The other is a new subject for us dealing with 
the question of interchange fees. The first of these is 
somewhat familiar; the second is not.
    We have before us two of our colleagues who are sponsors of 
the interchange bill. We will later today hear from one of the 
sponsors of the credit card bill.
    But let me now go to the gentleman from Pennsylvania, Mr. 
Shuster, I will go by seniority, and recognize him to talk 
about his legislation.

 STATEMENT OF THE HONORABLE BILL SHUSTER, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF PENNSYLVANIA

    Mr. Shuster. Thank you, Mr. Chairman.
    I appreciate the opportunity to be here today, and thank--
well, it is Ranking Member Bachus--but Ranking Member 
Hensarling for having us here today, and the members of the 
committee for allowing us to share some information on what I 
believe is an important topic, an important issue, and that is 
interchange fees in H.R. 2382.
    I would also like to thank Congressman Welch for his 
leadership on this issue and for working together with me on 
H.R. 2382. I believe action is needed to help level the playing 
field between consumers, small business, and credit card 
companies by requiring greater transparency and prohibiting 
unfair and abusive practices when it comes to interchange fees. 
Last summer's dramatic rise in gas prices was a prime example 
of the inflexibility of credit card companies towards merchants 
and consumers over the interchange fee.
    As most of us know, fuel prices doubled, and the 
interchange fee basically doubled with the fuel prices while 
the credit cards did nothing to add value but were able to 
collect windfall profits because of that. Also, as fuel prices 
rose above authorized transaction limits, major credit card 
companies reserved the right to repay gasoline merchants a 
lower price than was actually purchased, particularly on 
smaller transactions. I joined with Congressman Welch to 
introduce H.R. 2382 to curb this type of practice. This 
legislation focuses heavily on transparency in the hopes of 
determining whether credit card companies are pursuing 
anticompetitive practices.
    And again, it doesn't prohibit interchange fees. We just 
want to have some transparency and fairness injected into the 
process. It makes interchange fees subject to full disclosure 
in terms and conditions set by credit card companies, 
especially accessible by consumers. And we have here today, 
this is the interchange fee agreement, 1,000 pages. I am 
confident that few in this room could figure out what is going 
on in the agreement here. And many small businesses have that 
same problem in trying to understand what is happening in here.
    This H.R. 2382 would also prohibit profits from interchange 
fees being used to subsidize credit card rewards programs. 
Small businesses and ultimately consumers should not be 
financing the perks of luxury card holders.
    To put the impact of interchange fees into perspective of a 
business, I want you to consider a convenience store chain in 
my district, Sheetz; it is a real-life example. The Sheetz 
Corporation, which has 363 stores in six States, as I said, is 
headquartered in my district. Last year, Sheetz paid twice as 
much in interchange fees as they took in, in net income after 
taxes. Their second largest expense after payroll is the 
interchange fee, which is incredible to me. This means that, 
for Sheetz, the interchange fee eclipses the company's cost of 
rent for 363 stores. The interchange fee is also 1\1/2\ times 
the cost of providing health care to their nearly 13,000 
employees. And Sheetz is not alone.
    Sadly, it is joined by thousands of businesses across the 
country who are being unfairly penalized through interchange 
fees. Something must be done, and I believe H.R. 2382 is the 
right vehicle for that change.
    Mr. Chairman and members of the committee, I hope you will 
consider the merits of this bill as well as the serious 
struggles of small businesses across this country that need 
transparency, simplicity, and fairness when it comes to the 
issue of interchange fees.
    Again, thank you very much for giving me the opportunity.
    [The prepared statement of Representative Shuster can be 
found on page 57 of the appendix.]
    The Chairman. And another Member who has been very active 
in urging us to take this up, the gentleman from Vermont, Mr. 
Welch.

  STATEMENT OF THE HONORABLE PETER WELCH, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF VERMONT

    Mr. Welch. Thank you, Mr. Chairman.
    Thank you, members of the committee, for allowing me and 
Mr. Shuster to testify today.
    Credit cards are necessary in today's economy. They do 
provide a service to merchants in the form of secure payment. 
They provide a great service to consumers in terms of 
convenience. And it is reasonable to expect that merchants pay 
a fair fee for this service, just as consumers should pay a 
reasonable interest rate on credit.
    But just as with credit cards issued to consumers, the near 
monopoly of big banks and credit card companies has led to 
abuse. The amount of interchange fees collected by big banks 
tripled from 2001 to 2008, from $16 billion to $48 billion; 80 
percent of that money goes to 10 banks; not to 10 percent of 
our banks, but to 10 banks. Now, part of that is due to the 
increase in volume. But part is also due to the market power of 
credit card companies and big banks and to the fact that the 
interchange fees continue to rise so that now in the United 
States, they are the highest in the world.
    Credit card companies and big banks are also finding more 
ways to squeeze merchants, for whom the profit on an individual 
sale, as Mr. Shuster pointed out, can be completely canceled 
out by the cost of the interchange fee.
    The Welch-Shuster bill addresses these anticompetitive and 
abusive interchange practices. It raises four fundamental 
policy questions for this committee to consider:
    First, should credit card companies and banks have to 
disclose information about interchange rates? Our view is yes. 
And our bill would require that disclosure.
    Should merchants be able to freely advertise cash discounts 
without credit card company intervention? Our view is yes. This 
bill would ensure that merchants have that freedom.
    Third, should merchants have to subsidize rewards or 
premium credit cards from which they receive no benefit? Our 
view is no. And our bill would prohibit this practice. That 
would be an arrangement between the card issuer and the card 
user. If banks or credit card companies want to offer me 
airline miles, for example, my corner store should not have to 
pay. I should pay for that.
    Fourth, should the government be able to set rules of the 
road and require the banks and credit card companies to play 
fair? Our view is yes. And that is why our bill empowers the 
Federal Trade Commission to prohibit unfair or anticompetitive 
practices.
    Mr. Chairman, what is at issue here is a question of 
fairness and reasonable regulations. Credit card companies have 
near monopoly power. Individual merchants, one of whom, Kathy 
Miller from the Elmore General Store in Vermont, doesn't.
    And we welcome your consideration of these four policy 
questions that are presented by our bill. Thank you.
    [The prepared statement of Representative Welch can be 
found on page 58 of the appendix.]
    The Chairman. I thank our colleagues.
    Do any of the members here have questions for our 
colleagues?
    If not, we will thank them, and we will be in touch with 
them.
    Let me at this point, because we often have the most 
members here when we just start out, we have a third colleague 
who was interested in the credit card bill, the gentlewoman 
from New York, Ms. Lowey. I didn't inform her in time for us to 
do the formal clearing process. Would there be any objection if 
she were to speak on the next panel? Hearing no objection then, 
Ms. Lowey can be notified that she can come if she would like 
to and is able to; I know that is always a problem. Our two 
witnesses are excused.
    Mr. Welch. Can we stay for a few minutes?
    The Chairman. Yes. You won't be able to ask questions.
    But is there any objection to the gentlemen sitting with 
us?
    No?
    That kind of undercuts my argument that you were in a 
hurry, but go ahead.
    We will allow the Members to join us, but the size of this 
committee prohibits us from giving questioning privileges 
because we never have enough time for our members.
    We will now begin our opening statements. We can start my 5 
minutes, please.
    There are two bills before us today. One, as I said, is 
something we are familiar with. That is the bill that would 
move up the date of the credit cards. I thought that we could 
have done it more quickly. We accommodated people in the 
industry who said, well, we need time to prepare. We said at 
the time, many of us, that if this time were used instead to 
take advantage, we thought, of the time lag to move things up, 
that would be very problematic for us.
    In my judgment, some of that has happened. Recently, Bank 
of America announced that it would in effect be abiding by the 
main portions of the bill right away. That is welcome both for 
the customers of Bank of America, but also because it is an 
indication that one of the large credit card companies--and 
they have a massive operation here--is able to comply, that the 
timeframe is not as bad. This is not brand new to them. They 
have known about it for a while. I think the case is very clear 
that this is the kind of protection that shouldn't wait, and we 
should move forward.
    The interchange bill is different. It is new for us. It is 
a complex one. I will say, let me give a little history, I was 
on the committee--I am not sure any other members were at the 
time--early in the 1980's, when Congress, and I know some of 
the credit card companies tell us we should not interfere and 
we should leave this to the free market, but that wasn't their 
posture in the early 1980's when they lobbied Congress 
successfully to pass a bill interfering with the right of 
merchants to do certain things with regard to credit cards.
    I thought that was a violation of free market principles 
and voted against it. I was outvoted. In fact, I was so heavily 
outvoted that it passed on suspension and was signed by 
President Reagan. And I thought it was a lapse from free market 
principles.
    Those who argue that we shouldn't be dealing with the 
interchange issue because it is interfering with the free 
market, my response has been, well, the best way to do that is 
simply to remove any legislation that regulates what merchants 
can do with regard to the credit card industry.
    But the credit card industry has supported and maintained 
support for legislation in which the Federal Government 
restricts merchants' choices. And once you have done that, it 
is kind of hard to go back to being for the free market. The 
notion, having imposed that set of restrictions on merchants, 
it makes it harder to give discounts for cash; having imposed 
or to charge more for the card, having imposed that restriction 
on the merchants by Federal legislation, it seems to me very 
hard for the credit card industry to now go back and argue that 
they want to stick with the free market.
    It reminds me of the comment that had been made, I believe, 
by Harry Warner or Jack Warner in the motion picture industry 
about one of the motion picture stars, that he knew her before 
she had become a virgin. There are some things which, once 
lost, are not easily recovered, in my judgment.
    So that I think is what we have before us today. But it is 
a complex subject. It is a three-sided operation, because you 
have customers, the merchants, and the credit card companies. 
It is a subject that is an important one. Our colleagues on the 
Judiciary Committee had looked at it some from the antitrust 
standpoint, and they may still go ahead and do that. That is 
their jurisdiction.
    But we have jurisdiction as well. And this is the beginning 
of a serious look at this issue.
    With that, I will recognize the gentleman from Texas for 5 
minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Indeed, we do have two bills before us. Before I discuss 
them, I would at least like to acknowledge the absence of the 
author of one of them, the gentlelady from New York. Clearly, 
she is dealing with a great personal tragedy in her life. And 
although I have debated her frequently on the subject, she has 
certainly been a great professional in bringing this credit 
card legislation to the House. And even though I disagree with 
80 percent of the legislation, to get something that is of this 
import passed through this House has spoken well of her.
    I am somewhat sensitive of debating the issue in her 
absence, but knowing that we have debated it frequently, I know 
that there are plenty of people on her side of the aisle who 
will be able to--
    The Chairman. If the gentleman would yield, I thank him for 
that gracious statement.
    Let me say on behalf of our colleague, Ms. Maloney, she is 
fully understanding of this. And I am sure she will be 
appreciative of the sentiment and, of course, has no objection 
to the gentleman going forward.
    Mr. Hensarling. Thank you.
    I think before considering the implications of either of 
the two pieces of legislation, we need to take a very careful 
look at where we are in this economy.
    Since we have passed the President's economic stimulus 
program, unfortunately, another 3 million of our fellow 
citizens have lost their jobs. We now have the highest 
unemployment rate we have had in a quarter of a century at 9.8 
percent. Most professional economists believe that will soon 
tick up to 10 percent.
    I need not tell you where we stand with respect to the debt 
and the deficit. The Federal Reserve released information 
yesterday that I believe showed that total consumer credit 
outstanding, which includes everything from credit card debt to 
loans for recreational vehicles, fell $12 billion in August, or 
5.8 percent in a seasonally-adjusted annual rate--the 7th 
straight month of declines--longest stretch since 1991.
    Other Federal Reserve data has indicated that credit card 
lines have now been cut, I believe, by 25 percent in the last 
year. In the last 2 years, credit card lines have been cut by 
$1.25 trillion. I am very concerned about the impact that this 
has on small businesses.
    We have had testimony in this committee room, and I have 
had lots of testimony in the Fifth Congressional District of 
Texas which I have the honor of representing, that tells me 
that small businesses that rely upon credit cards are having 
trouble accessing credit lines to preserve and create jobs. And 
I think job one of this committee and this Congress ought to be 
getting this economy moving again, getting people jobs. And so 
I am concerned about the potential unintended consequences that 
either of these pieces of legislation would have.
    Now, speaking first to what we have known as the Credit 
Cardholders' Bill of Rights, I would just say, and now we have 
a new piece of legislation that would essentially move up the 
timetable for this legislation. I do not believe there is a 
good time to enact a bad bill. This is a bad bill. I believe in 
20 percent of it. I do believe that consumers have been misled 
on disclosures. I do believe there are deceptive practices out 
there. But unfortunately, this bill goes way beyond that. And I 
am afraid that both bills may have the potential to simply 
exacerbate a credit crunch at a time when small businesses are 
having trouble accessing credit, again, to create and preserve 
jobs.
    Ultimately, the so-called Credit Cardholders' Bill of 
Rights, which I still view as a ``credit cardholders' bill of 
wrong,'' erodes risk-based pricing. And it is risk-based 
pricing that has allowed millions of people to access credit 
who haven't been able to access it before, including, again, 
small businesses. I believe in many respects, it represents 
another bit of bailout legislation, because it tells the people 
who do it right, ultimately they are going to pay higher fees 
and higher interest rates to help subsidize those who do it 
wrong.
    And I hate to say that I told you so, but when we debated 
this bill, I predicted what would happen. And indeed, we see it 
happening. Now, credit card companies, in anticipation of this 
legislation, are cutting back the lines even further. And I am 
afraid we could exacerbate the situation.
    With respect to the interchange, I am still very curious 
ultimately what this bill is going to do to help consumers. I 
am not unsympathetic to those who complain about it, but I am 
wondering, how is this any different from the costs that one 
pays for payroll, one pays for real estate, or their 
advertising. It is a cost of doing business. If there are legal 
restraints of trade here, I would like to hear about them. If 
there are legitimate antitrust issues, I would like to hear 
about them. Otherwise, I see my time is up, so I will have to 
hear about them later.
    Mr. Gutierrez. [presiding] I gave you a little extra time 
there because we are friends.
    I yield myself the remainder of the time. On April 30th of 
this year, I stood next to Chairman Frank and other members of 
this committee after we passed the CARD Act on the House Floor 
and listened as the chairman issued a warning to the credit 
card-issuing banks. Chairman Frank told the banks that if they 
began to speed up rate increases or continue the practices that 
we had just prohibited, then we would move up the 
implementation date on the CARD Act. He cautioned them in no 
uncertain terms that this committee would not hesitate to stop 
them if they continued to take advantage of and abuse 
consumers.
    With that warning, the House passed an amendment to allow 
the banks sufficient time to implement substantial strict and 
admittedly complicated changes to the way they do business. But 
I never anticipated how uncomplicated it would be for the banks 
to continue with the very practices that we had just banned. We 
were reasonable. We were fair. The banks were not. We can't 
turn back the clock, but we can make sure that the banks' 
unreasonable practices do not continue to affect more American 
households.
    Today, we must begin the process of accelerating the 
implementation date of the Credit Cardholders' Bill of Rights. 
When I got home that day from the signing ceremony for the 
legislation at the White House, I had a notice in the mail. It 
said that my bank was increasing my rate, decreasing my 
available credit, and increasing fees across-the-board. This 
was the very day President Obama signed the bill into law.
    What I hope to find out during the third panel of this 
hearing is why it is so easy for credit card companies to 
nickel and dime their customers as quickly as they do, while at 
the same time it takes so long to end unfair and deceptive 
practices that this Congress has banned?
    I listened to my colleague, Mr. Hensarling, talk about 
risk-based pricing. And I will just end with this, not to take 
any more time, what changed? What changed between the day we 
passed the bill and the day I arrived home to get my changes 
from my credit card company? I have the most secure job that 
exists in this economy, a government job. I can't think of a 
more secure job. I still have--I have been a nine-term Member. 
I don't know, did they make some evaluation that I had an 
opponent in the next primary who was going to knock me out? I 
wish they would let me know. I haven't had an opponent in the 
last 3 elections in the Democratic primary, and I have a 90 
percent Democratic district.
    So I tell you all that to say, I don't understand what the 
new risk was. I have an 800-point credit score. We pay our 
bills on time. Maybe we do it too well. So I was a risk? No, 
what they decided to do was change the terms of our contract as 
they did to advance and to accelerate it. We told them, don't 
do it. We gave them an amendment. We were fair to the banks, 
and the banks were not fair to the consumers.
    We will now proceed--oh, we have Mr. Castle for 2 minutes.
    Mr. Castle. Thank you, Mr. Chairman. I have concerns about 
both pieces of legislation here.
    First, with respect to the CARD Act and moving up the date, 
let's recall that date was already moved up from what the 
Federal Reserve was doing to what we did in legislation. The 
net result of that has been, as Mr. Hensarling has indicated to 
us, that we see fewer people getting credit at this time. We do 
see people getting cut back on the credit which exists. And we 
are seeing many jobs in the credit card industry in this 
country being already reduced, and probably many more to be 
reduced when all this goes into effect. So it has had some 
negative economic effect, particularly for people who can't now 
get credit and cannot now go out and spend in our economy. We 
need to at least consider this. I am not suggesting we should 
just oppose the bill arbitrarily, but we need to consider all 
the consequences of what we are doing.
    And the same thing applies with respect to the interchange 
legislation. I listened to our two distinguished colleagues who 
spoke about that. And as has been indicated here, I heard no 
mention of reduction of costs as far as consumers are 
concerned. Apparently, the concern is strictly with those who 
are handling the cards in their business and what they are 
doing. And I would agree completely with the concepts that were 
put forward. We do need to have greater transparency, the full 
disclosure. This is not something that necessarily seems to 
affect consumers, because nobody has indicated they would 
reduce costs if indeed legislation like this would pass.
    But I think among the merchants and those people who are 
issuing the cards, there indeed needs to be an openness and a 
responsibility. So we can approach this legislation, but we 
need to approach it very carefully. I don't think in this time 
of our economy, that we can afford to just pass legislation 
which is going to be too vindictive in terms of reduction of 
interchange fees or even elimination of the same. The same 
thing applies to the credit card legislation. We just need to 
be very cautious about the downside consequences.
    I appreciate the opportunity and I yield back, Mr. 
Chairman.
    Mr. Gutierrez. The gentleman yields back.
    Congressman Scott, you are recognized for 2 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    I want to thank the chairman for holding this important 
hearing on credit card issues. I want to focus mainly on the 
simmering battle between the banks and retailers regarding 
credit card interchange fees. I have constituents in both camps 
who have vigorously pleaded that their case is very important 
on this issue.
    At the center of the debate is the question of whether or 
not banks are overcharging merchants for processing credit 
cards and other products at the point of sale. The retailers 
claim that interchange fees have unfairly increased annually, 
despite better technology and more efficient processing 
systems. The banks claim that the system is more complex than 
the retailers describe. And they also are carrying the risk of 
data protection and credit losses. Both industries are in the 
unfortunate situation of operating on thin margins of profits.
    So I hope this hearing will focus on what the consumer 
wants, since they are stuck in the middle. In this economy, the 
consumers want easy access to their credit. They want no hassle 
at points of sale. They want use of multiple types of payment 
products. And they most definitely want protections against 
fraud and low prices.
    This is a very, very important hearing this morning, Mr. 
Chairman. I thank you for yielding me time on this important 
issue.
    Mr. Gutierrez. Mr. Hensarling, any other time?
    Then, we will go to our second panel.
    Ms. Kathy Miller, board member of the Vermont Grocers 
Association, you are recognized for 5 minutes.

 STATEMENT OF KATHY MILLER, OWNER/OPERATOR, THE ELMORE STORE, 
  ELMORE, VERMONT; BOARD MEMBER, VERMONT GROCERS' ASSOCIATION

    Ms. Miller. Good morning, Mr. Chairman, Congressman Welch, 
and members of the House Financial Services Committee.
    I would like to thank you for allowing me to testify today. 
My name is Kathy Miller. And I--along with my husband Warren 
and daughter Kelly--am the owner of the Elmore Store in Elmore, 
Vermont.
    I am also here today as past Chair of the Vermont Grocers 
Association, and on behalf of the Food Marketing Institute and 
National Grocers Association, which represents our Nation's 
supermarkets and grocery stores.
    We appreciate you holding this hearing and for the 
opportunity to provide testimony on credit card interchange 
fees, also known as swipe fees to merchants who have to pay the 
fee each time a card is swiped.
    Thank you to my Congressman, Peter Welch, for inviting me 
here today to testify.
    It has been 3 years since I testified before the Senate 
Judiciary Committee at the invitation of Senator Leahy on the 
anticompetitive and anticonsumer practices of the credit card 
companies.
    Unfortunately, many of the same problems still exist today, 
and interchange fee costs have continued to rise at the expense 
of small businesses like ours. This is a store that we have 
owned and operated now for 26 years. I am a fifth generation 
Vermonter, with deep roots in Elmore. I am the ``mom'' part of 
the operation. My husband Warren, ``pop,'' is minding the 
store, so I can be with you today. Warren has recently served 2 
terms in our State legislature in Montpelier.
    We are not only committed to our store, but to our 
community and to the State of Vermont as well. You may wonder 
why we do what we do 7 days a week, 96 hours a week, 364 days a 
year. To be honest, sometimes we ask ourselves that same 
question. But we believe that we can and do make a difference 
to the people in the community who depend upon us. My concerns 
as a small independent store may seem small to you, but they 
are a huge burden to us and very real.
    Congressman Welch listened to these concerns from Vermont 
storekeepers like me, and he wrote legislation to try to 
address several of them. Warren and I commend Congressman Welch 
for introducing this important legislation to protect small 
businesses like our store in Vermont. And we look forward to 
consideration of the Credit Card Interchange Fees Act by this 
committee.
    Since I told my customers I was coming to Washington, D.C., 
to testify on this issue, I can't even tell you how many of my 
customers were unaware of the hidden fees. They swipe their 
cards and think all is free because there is no charge to them 
at all. Obviously, we lose money on many small transactions, 
and too much on others. So we have to raise prices because we 
can't absorb it all. In the grocery business, we compete by 
lowering prices, not by raising them.
    I am not a lawyer, but I know this is a huge problem that 
retailers across the United States, large and small, are 
facing. So I ask you to look at this matter seriously.
    I have customers who apologize to me for using their cards. 
I keep telling them, please, keep coming in the store and 
shopping. We need and appreciate your business. We have 
streamlined our business to reduce costs as best we can. 
Maintenance doesn't get done as it should. Less money goes out 
in payroll. But we just can't keep absorbing these fees in 
these tough economic times.
    If the interchange swipe fees were fair and reasonable, 
Warren and I would have more money to invest back into our 
business. An example is, we only have one phone line to save 
money. I can't take a deli order. I can't do grocery orders 
with my line tied up to swipe credit cards. What happens in a 
small country store is when a customer swipes their card for a 
pack of 35-cent gum, it is pre-priced, and it costs us 21 
cents. The swipe fee on that sale costs us 21 cents, so I just 
lost money. I might as well just let them take the gum. A 99-
cent bag of chips is prepriced, again, and it costs us 74 
cents. The credit card fees are 23 cents. I can only make 2 
cents on that sale. What is wrong with this picture?
    Congressman Welch's bill would allow us to set reasonable 
minimum purchase requirements. Visa and MasterCard require us 
to accept all their cards if we take any. And they market a 
whole host of affinity cards with so-called free features. I 
rode in on a plane. I haven't been on a plane in, I can't tell 
you how long. And I have lost it now, but there was a napkin in 
front of me, ``get free airplane rides.'' Nothing is free.
    Oh, here it is. Thanks.
    So what they can't tell you is they charge merchants higher 
interchange rates for accepting these cards. Warren and I 
haven't gone on a vacation in 10 years; yet every day we are 
paying for our customers' trips when we take their credit 
cards.
    The Visa and MasterCard contract rules are not law, so why 
do we comply with them? This hasn't happened to us yet, but we 
have heard stories of other small businesses being threatened 
with excessive fines for breaking the rules, even for something 
as minor as requiring a $5 minimum to use a credit card. A 
$5,000 a day fine, which I hear is Visa and MasterCard's going 
rate these days, would simply put us out of business. I had a 
store owner call me to say, ``We are going to get fined 
$25,000. What should we do?'' I said, ``Take your signs down. 
We can't set minimums.''
    The average supermarket industry profit margin last year 
was 1.43 percent. That means a profit of $1.43 on a $100 
transaction. The interchange paid to the bank to issue that 
card on the same transaction is more than that. I would like to 
ask you on your next ride home to take a look and see how many 
vacant storefronts there are in your small downtowns. Just this 
last winter alone, 6 stores closed within a 50-mile radius of 
us.
    Some days I feel like I should just turn my keys in, but 
too many people count on us. Elmore is a town with 850 people. 
We are the hub. We are mom and pop. We are just trying to keep 
our doors open.
    Thank you very much, and I would be pleased to answer 
questions.
    [The prepared statement of Ms. Miller can be found on page 
215 of the appendix.]
    Mr. Gutierrez. Thank you very much.
    Mr. David Evans, a lecturer at the University of Chicago 
Law School.
    Welcome.

 STATEMENT OF DAVID S. EVANS, LECTURER, UNIVERSITY OF CHICAGO 
                           LAW SCHOOL

    Mr. Evans. Good morning. Thank you very much.
    I would like to thank Chairman Frank and Ranking Member 
Bachus for inviting me to testify.
    Members of the committee, my name is David S. Evans, and I 
am a lecturer at the University of Chicago Law School and also 
a visiting professor at University College London.
    Despite the law school affiliations, I am actually an 
economist. I have written on the payment industry from both the 
business and policy perspective, including ``Paying with 
Plastic,'' which has become the standard reference work on the 
industry.
    I represent solely myself at the hearing today. But in the 
interests of transparency, I just want to note that Visa funded 
my research on the payment card industry for many years. In 
recent times, though, I have been a business adviser to many of 
the innovative entrants into the payments business. And that 
includes several companies that compete with the incumbent 
networks and issuers in part by offering lower merchant fees.
    Economists have been studying the subject of interchange 
fees and related practices since the early 1980's. There has 
been a flurry of research in the last decade. Much of the 
research is based on the new field of economics known as two-
sided markets. Businesses that create value by bringing 
different kinds of customers together are said to be two-sided. 
So a stock exchange like NASDAQ brings liquidity providers and 
liquidity takers together, while a matchmaking service like 
eHarmony brings men and women together.
    Payment cards help merchants and individuals to transact 
with each other. So cardholders and merchants are in effect the 
two sides of the business.
    I have appended to my statement today an article that I co-
authored with Dick Schmalensee that provides some of the key 
references that back up some of the things I am going to say.
    So this research provides several insights. First, it turns 
out that it is very difficult to say in practice that the 
interchange fee charged by a payment network is too high, too 
low, or just right from the standpoint of public welfare. And 
it is even more difficult for a regulator to have any 
confidence that it could establish a better interchange fee. 
This argues for caution in price regulation of interchange 
fees.
    Government regulation is appropriate when it is possible to 
both identify a market failure and fix that failure without 
creating significant unintended consequences. That is not 
possible with the current economic state of knowledge on 
interchange fees.
    H.R. 2382 wisely stays away from specific price regulation, 
in my view.
    Second, and very importantly, any change that is made to 
the pricing for one side of a two-sided business will tend to 
have an opposite effect on the other side. Two-sided businesses 
recover their costs and they earn profits from both sides. So 
if a two-sided business earns less on one side, it usually has 
to earn more on the other side. Many daily newspapers, for 
example, are charging people more because they are making less 
money from advertisers.
    In evaluating the bill before you, it would be prudent in 
my view to anticipate how the changes to merchant pricing and 
other changes will ultimately affect cardholders. There 
probably is not a free lunch here.
    Third, the customers of two-sided businesses interact a 
lot, and the platform makes money by promoting valuable 
interactions. But the platform also has an interest in policing 
bad behavior. So eBay, for example, is a two-sided business. It 
tries to get buyers and sellers to swap a lot of stuff. But it 
also has rules that buyers and sellers have to follow; eBay 
protects buyers by kicking sellers that repeatedly fail to meet 
their end of the bargain off of eBay.
    I mention this in the context of H.R. 2382 because many of 
the policies that the bill seeks to restrict at least arguably 
benefit one side of the market, namely individuals who carry 
cards and want to use them freely and easily. A card brand can 
provide benefits to individuals by assuring them that their 
card will be accepted everywhere and that these individuals 
won't be surcharged.
    One could also argue that the network policies that are the 
subject of H.R. 2382 are anticompetitive or contrary to the 
public interest, but I believe it would be prudent to consider 
the procompetitive explanations as well as any anticompetitive 
ones that you want to think about.
    Most likely, again, there is no free lunch here either. 
Prohibiting the networks from imposing various restrictions 
will likely impose some collateral costs on end consumers.
    And if I have one more minute to continue, there are many 
elements to this bill, and I have not done a careful study of 
it. I would like to suggest, however, that payment cards is one 
of the most complex industries that economists study. There are 
many moving parts and interdependency between merchants, 
cardholders, processors, acquirers, networks, and other 
players. And as a result, there is a greater risk in this 
industry than in many others for government intervention to 
have unintended consequences.
    Finally, I am not aware as an economist of any systematic 
evidence that would support the position that the payment card 
network practices targeted by H.R. 2382 cause public harm 
overall once we take into account the interests of consumers, 
or that the types of restrictions on payment card networks 
suggested in the bill would ultimately enure to the public.
    I also don't believe that any of the targeted practices are 
in fact anticompetitive under U.S. law.
    Thank you, again, for the opportunity to appear before this 
committee. And of course, I would be very happy to respond to 
your questions. Thank you.
    [The prepared statement of Mr. Evans can be found on page 
191 of the appendix.]
    Mr. Gutierrez. Thank you.
    Mr. Mark Caverly, executive vice president of the Local 
Government Federal Credit Union, on behalf of CUNA and the 
Electronic Payments Coalition, you are welcome. You have 5 
minutes.
    Mr. Caverly. Thank you. Good morning.
    Mr. Gutierrez. Good morning, sir.

  STATEMENT OF MARK CAVERLY, EXECUTIVE VICE PRESIDENT, LOCAL 
GOVERNMENT FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT UNION 
    NATIONAL ASSOCIATION (CUNA) AND THE ELECTRONIC PAYMENTS 
                        COALITION (EPC)

    Mr. Caverly. Mr. Chairman, members of the committee, thank 
you for the opportunity to testify today in opposition to H.R. 
2382, the Credit Union Interchange Fees Act of 2009.
    My name is Mark Caverly, and I am speaking today on behalf 
of the Credit Union National Association and the Electronic 
Payments Coalition. My credit union is a member of CUNA, the 
largest advocacy organization for America's 92 million credit 
union members.
    And CUNA is a member of the EPC. The EPC includes credit 
unions, banks, and payment card networks that move electronic 
payments quickly and securely between millions of merchants and 
millions of consumers across the globe. The goal of the EPC, 
and the reason I am before you today, is to speak for the 
consumer and to protect the value, innovation, convenience, and 
competition in today's electronic payments system.
    I serve as executive vice president for the Local 
Government Federal Credit Union in Raleigh, North Carolina. We 
serve the financial needs of local government employees, 
elected officials, volunteers, and their families. My credit 
union has 178,000 members, and we are the issuers of 173,000 
debit cards and 16,000 credit cards for our membership.
    To begin, allow me to cover the who, what, and why of 
interchange. Who is responsible for interchange? Interchange is 
the responsibility of the merchant and the merchant's bank. 
Card issuers such as my credit union who assume the risks of 
fraud, nonpayment, and the administration of the card program 
receive interchange.
    What is interchange? First of all, interchange is not a fee 
on consumers. To the contrary, interchange represents the 
merchants assuming their fair share of the financial 
responsibility for the card payment system. Merchants receive 
many benefits and tremendous value from accepting cards. The 
merchant discount fee, which includes the interchange amount, 
is the merchants' cost of doing business for accepting this 
valuable form of payment. The credit union's cost of doing 
business includes funding costs, credit losses, billing and 
collections, customer service, data processing, and compliance. 
The value merchants receive when we administer these programs 
and assume significant risks for their benefit far exceeds the 
interchange fee.
    Why is interchange important to credit union members? As an 
issuer, my credit union receives interchange when our members 
use their debit and credit cards. Interchange helps us support 
the card programs for the benefit of our members or the 
consumers. In fact, interchange for my credit union's card 
program represents 14.4 percent of my credit union's total 
income year-to-date.
    Our concerns regarding this legislation come down to a 
simple point: If my credit union's interchange decreases, 
consumer costs increase. Reducing the merchants' interchange 
responsibility would result in costs shifting from merchants to 
consumers, and increased fees for consumers to obtain debit and 
credit cards.
    While the bill simply references credit card interchange 
fees in its title, the bill would also address debit card 
interchange, and would create significant changes to the 
foundation of the electronic payments system. The bill reduces 
consumer choice and increases consumer costs and confusion in 
many ways.
    But allow me to share a few examples with you. First, the 
merchants are seeking to abolish the honor-all-cards rule or 
practice that merchants must follow. As a consumer, you may 
choose to carry only one credit card and one debit card with 
you. Now, imagine your favorite chain restaurant has either 
decided not to honor cards issued by credit unions or has 
entered into an agreement with a large financial institution. 
The restaurant tells you that they won't accept the card of 
your choice or will only offer more favorable prices to the 
cards issued by the large financial institution. Consumers want 
honor-all-cards because it gives them the choice as to what 
card to carry.
    Second, gas stations are seeking to abolish the current 
system regarding charge-backs. Essentially, it would absolve 
them from the financial responsibility when they allow card 
transactions to be processed in violation of the preauthorized 
amount for the sale. If this were enacted, my credit union will 
assume even more of the risk of fraud and an increase in the 
risk of nonpayment. And as a nonprofit financial cooperative, 
when our costs increase, so do the costs to our consumer 
members.
    Finally, by not mentioning data security, this bill allows 
merchants to continue to walk away from their data security 
responsibilities. Cleaning up after merchant data security 
breaches is a significant cost that we as credit unions 
continue to pick up.
    In conclusion, credit unions oppose H.R. 2382 and other 
legislation designed to decrease the merchants' responsibility 
for the value they receive from the card payment system. If 
merchants are successful in reducing their fair share of 
responsibility for the card payment system, the consumers will 
pick up the difference.
    Thank you for giving credit unions and their consumer 
members an opportunity to share our position on interchange and 
the card payment system.
    [The prepared statement of Mr. Caverly can be found on page 
110 of the appendix.]
    Mr. Gutierrez. Next, we have Mr. Ed Mierzwinski, consumer 
program director, U.S. PIRG.
    Please, you are recognized for 5 minutes.

  STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, 
                           U.S. PIRG

    Mr. Mierzwinski. Thank you, Chairman Gutierrez, Mr. 
Hensarling, and members of the committee.
    I am Ed Mierzwinski, of the U.S. Public Interest Research 
Group.
    This is a very fascinating consumer issue. And we have 
supported the Welch-Shuster bill, H.R. 2382, to give merchants 
a fairer shake against the credit card companies and the credit 
card networks. We believe that the proposed bill addresses a 
number of flaws and problems in the system.
    Let me describe just briefly how it works. First of all, 
approximately 2 percent of every dollar that you spend goes to 
a fee called the merchant discount, but the bulk of it is this 
interchange part that is essentially nonnegotiable. Recently, 
debit and credit combined passed all cash transactions.
    If you presume for the purpose of discussion that 50 
percent of transactions cost the merchant 2 percent more than 
its other transactions, then he or she has to raise his or her 
costs to all consumers, including those who don't pay with 
credit or debit, by 1 percent; 50 percent raises your costs 2 
percent, so 100 percent pay 1 percent more. So all consumers 
pay more at the store and more at the pump because of 
interchange that is nonnegotiable, nontransparent to the 
merchant.
    Second, it is a really kooky system in a lot of ways. One 
of the ways is that merchants are forced under this honor-all-
cards provision to accept a Visa card that looks exactly like 
another Visa card, except that it costs the merchant 3 percent 
or more instead of 1 or 2 percent. Why does this Visa card cost 
more than that Visa card? Well, it is because of rewards 
programs. Interchange doesn't just pay for fraud. Interchange 
doesn't just pay for the system. It pays for solicitations, the 
5 billion trees that cry every year because of all the--well, 
maybe it is not 5 billion trees, but it is 5 billion letters 
from credit card companies, the solicitations, and the rewards.
    So who benefits from rewards? I submit that only 
convenience credit card users benefit primarily from rewards. 
The purpose of rewards debit is to drive people to debit 
transactions so that merchants can earn more money. But 
revolving credit card users don't make money on rewards. If it 
costs you 25 percent APR to carry a balance and you are getting 
a 1 percent reward, you are not benefiting from rewards. So it 
is not all credit card customers; it is only some. And it is 
not all consumers; it is only those who use cards.
    There are other problems with the system. Merchants are 
prevented by these thousands of pages of contractual gibberish 
from providing their customers with a choice of a lower cost 
discount for cash. They may not be prohibited explicitly, but 
the merchants tell me that it is a serious problem that the 
banks force on them. They make it very difficult for them to 
offer their customers discounts for cash.
    So I think there are some serious problems in the 
interchange system that will be addressed by the Welch-Shuster 
bill and that will benefit all consumers.
    Again, I am concerned with all consumers. I am not simply 
concerned with credit card customers. Today we have an increase 
in the use of debit, but not all of that debit is associated 
with bank cards.
    I want to make one point unrelated to the bill. I would 
encourage the committee to also look at increasing the consumer 
protections that apply to all prepaid cards. As we use more 
payroll cards, as we use more prepaid debit cards not 
associated with bank accounts, as lower-middle-income working 
families accept their social welfare benefits through EBT, they 
are all paying interchange, but the merchants--I am sorry, the 
banks and the interchange networks are not providing those 
consumers with the same consumer protections as consumers have 
with the gold standard of a credit card or the less than gold 
standard of Regulation E, which provides consumers of bank-
issued debit cards with consumer protections. We need a whole 
revamp of the payment system to protect consumers.
    In the couple of seconds that I have left, I also want to 
strongly support the bill to accelerate enactment of the final 
provisions of the Credit Cardholders' Bill of Rights. The banks 
have been behaving badly.
    And then I want to say, how did we get into this mess in 
the first place with the credit card companies? Well, the 
reason is we didn't have a regulator whose job was to protect 
consumers. And that is why this committee needs to pass a 
strong consumer financial protection act that restores Federal 
law as a floor, not a ceiling. Keeping preemption is a big 
mistake. I urge you to stick with the bill and not support any 
amendments to add preemption to the bill. Thank you.
    [The prepared statement of Mr. Mierzwinski can be found on 
page 200 of the appendix.]
    Mr. Gutierrez. The Honorable Ann D. Duplessis, Liberty Bank 
senior vice president of retail banking and marketing and 
sales, on behalf of the Independent Community Bankers of 
America.
    You are recognized for 5 minutes.

   STATEMENT OF THE HONORABLE ANN D. DUPLESSIS, SENIOR VICE 
  PRESIDENT, LIBERTY BANK AND TRUST, NEW ORLEANS, LOUISIANA; 
STATE SENATOR, DISTRICT 2, LOUISIANA STATE SENATE, ON BEHALF OF 
      THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

    Ms. Duplessis. Thank you, Mr. Chairman, and members of the 
committee. Again, my name is Ann Duplessis, and I am a senior 
vice president of retail banking with Liberty Bank and Trust, a 
$400 million community bank headquartered in New Orleans.
    I am also a proud Louisiana State Senator, representing 
areas in New Orleans, in and around New Orleans' Lower Ninth 
Ward, eastern New Orleans. I am also the chairman of the 
Commerce, Consumer Protection, and International Affairs 
Committee, and am pleased to be here today on behalf of the 
Independent Community Bankers of America to discuss this very 
important issue of interchange.
    I also asked that you be given a separate ICBA statement on 
the credit card bill, and hopefully that can be included in the 
records.
    Just a little bit about Liberty Bank. We started in a 
trailer in New Orleans about 37 years ago, and we have grown to 
more than 13 locations across 5 States. We are one of the five 
largest African-American-owned financial institutions in the 
country. In addition to my current role at Liberty Bank, I was 
also a small business owner, operating a hair salon and day spa 
and a business consulting practice.
    On behalf of ICBA's nearly 5,000 member banks, I want to 
thank you for the opportunity to testify on the important role 
credit and debit card interchange fees play in supporting 
community banks and our customers. The payment card system 
provides tremendous benefits to consumers and merchants, but it 
is not cost-free. Liberty Bank is both an acquiring bank for 
merchants and a card issuer. Our customers are both individual 
consumers and local merchants who have decided, after shopping 
around, that we can provide them with the best acquiring 
services.
    Even a relatively small acquirer like Liberty Bank can 
provide merchants full access to the global electronic payment 
systems. As a community banker serving local merchants, and as 
a former small business owner, I strongly believe the key 
points in this entire debate over interchange fees is being 
masked behind misleading rhetoric from the large merchants that 
stand to benefit by congressional action.
    The most important concern for any small retailer, their 
banker, and ultimately the customers who pay for the goods and 
services is merely the cost of handling money. Money is given 
and received in many forms, all of which have costs. Cash and 
checks have given way to plastic, not only due to consumer 
preference but also because accepting electronic payments is a 
more efficient and less costly way for merchants to provide 
these services. I know because I have seen this firsthand as a 
business owner and as a banker who every day works to improve 
the bottom line of my local retailers.
    Credit cards are the only loan or credit product that 
generally allows the consumer to control how much he or she 
will owe and whether he or she will pay a finance charge or 
just be a convenience user. Our credit card programs are not 
huge profit centers, but they have real value and give me the 
basic ability to offer products to consumers and merchants 
coupled with superior customer service that community bankers 
can provide.
    Distorting the network rules in favor of large retailers 
and away from consumers would jeopardize the ability of 
community banks to continue to offer these services. If more 
small banks stop offering interchange-supported products and 
services, it is likely that the industry would consolidate into 
just a few very large issuers and acquirers.
    In the Credit Card Interchange Fee Act, large merchants 
simply want Congress to intervene so they can pay less and 
follow fewer rules for the benefits they receive from the card 
accepters.
    This bill would also create a burden for consumers by 
reducing their flexibility. Today, Liberty Bank cardholders 
know that their payment card will be honored at any merchant 
accepting electronic payments. This bill would allow a merchant 
to now dictate to consumers the terms of use and which cards 
that consumer must carry. If a Liberty Bank card is no longer 
accepted universally, my customers may be forced to apply for 
multiple cards that they don't want or need, thus decreasing 
credit scores and making it more difficult to get credit. It 
would create an incredibly inefficient and uncertain shopping 
experience if customers no longer control their own payment 
choices.
    Mr. Gutierrez. The time of the gentlelady has expired.
    Ms. Duplessis. Thank you.
    [The prepared statement of Ms. Duplessis can be found on 
page 180 of the appendix.]
    Mr. Gutierrez. You are very welcome.
    And now, we have Mr. Mallory Duncan, senior vice president 
and general counsel, National Retail Federation, on behalf of 
the Merchants Payments Coalition.
    You are recognized for 5 minutes, sir.

STATEMENT OF MALLORY DUNCAN, SENIOR VICE PRESIDENT AND GENERAL 
COUNSEL, NATIONAL RETAIL FEDERATION, ON BEHALF OF THE MERCHANTS 
                       PAYMENTS COALITION

    Mr. Duncan. Thank you, Mr. Chairman. I want to thank the 
ranking member and members of the committee. I would like to 
thank you and the members of the committee for allowing me to 
appear.
    Let me state the obvious. We are retailers. No one believes 
in free markets more than we do. We know that free markets work 
when there is transparency, few fetters on competition, and 
ideally, an absence of concentrated market power. That is the 
world we face with most of our suppliers, and it is what we as 
an industry deliver to our customers.
    Retail competition is fierce. It is reflected in very thin 
profit margins, typically around 2 percent. With margins that 
narrow, when costs go up, so do prices. When costs go down, 
competition pushes prices down as well. You can buy great 
electronics for a fraction of the price you would have paid a 
few years ago. That is the beauty of the competitive market.
    We want to provide value to our customers, and that is why 
we are so concerned by what the credit card companies are doing 
to us and to the American consumer; they are doing it with 
hidden fees, arcane rules, and overwhelming market power.
    The credit card market is broken and needs to be fixed. The 
card industry has told you that the market is functioning fine, 
that it is so complicated and two-sided that you had best just 
ignore it. That sounds like what they said about subprime 
loans. But in truth, it is a very simple scheme; they don't 
want oversight because what they have is a privately regulated 
cartel.
    The banks and the members of Visa and MasterCard will tell 
you the market is competitive. As appendix A at the back of my 
testimony indicates, in part that is true, they do compete for 
customers, but on the merchant side, the opposite is true. 
Since its inception Visa and its big banks have gotten together 
and decided how much they are going to charge to process 
payments. Once the decision is blessed, all issuing banks 
charge the same fee regardless of the bank's name that is on 
the card. These otherwise competing banks huddle under the Visa 
and MasterCard rules as one, and insist that merchants accept 
their cards, fees, and rules on a take-it-or-leave-it basis, 
with no opportunity to negotiate. No merchant can stand up to 
that.
    Now, both firms have changed recently their structures, but 
the net result is the same. We have here cartels operating in 
violation of the antitrust laws. But there is more. They also 
fix the rules, rules designed to support the cartel and to hide 
its operation from consumers who ultimately pay most of these 
fees. It is this lack of transparency and these confining rules 
that the Welch-Shuster bill addresses. Let me give you a couple 
of examples.
    The card companies have what they call a nondiscrimination 
rule. It prohibits merchants from giving customers a discount 
if the customer uses the card with lower fees. This is a 
remarkably anti-competitive rule. It is like Coca-Cola telling 
grocery stores that they could be fined or their right to sell 
Coke products revoked if they charge people less for Pepsi than 
for Coke. Its effect, of course, is to discourage the market 
from moving towards cheaper forms of payment. Welch-Shuster 
would open the market up to competition.
    Or take pricing generally. The card companies' rules say 
that the regular price we offer the public must be the credit 
card price, but a 2 percent profit margin isn't large enough to 
absorb a 2 percent interchange fee. So a shopping cart of back-
to-school clothes that we would willingly sell for $99 cash has 
to be priced somewhere around $101 because of their rules. But 
look at what is happening, $101 becomes the regular price for 
$99 worth of cash merchandise. And regardless of whether one 
uses cash, check, or food stamps, we all end up paying the 
credit card company price. In effect, interchange acts as a 
privately imposed hidden sales tax on U.S. commerce.
    As to transparency, most consumers don't realize that 
rewards cards cost far more to use than does a regular card. Do 
consumers know that swiping rewards cards drives up the price 
of everything they buy even higher?
    Now, if I may, I would like to raise one issue that NRF is 
very concerned about that does not apply to the Welch bill, and 
that is debit cards. Cash and check pass at par, that is face 
value. The Federal Reserve says that in return for a $100 
check, a bank must give you $100 in exchange, yet $100 on a 
debit card is subject to interchange fees. But what is a debit 
card other than a plastic check? There is no loan; they are 
even called ``check cards.'' It is time for Congress to demand 
that Fed do for plastic checks what they have long insisted on 
for paper checks. Otherwise, again, we will end up eating up 
the value.
    In conclusion, you should know that the bulk of interchange 
goes to a handful of banks. There are roughly 10,000 banks in 
each of the card networks, yet more than 80 percent of the 
interchange goes to just 10 big banks. But they don't show up 
here to defend it. Apparently they are not only ``too-big-to-
fail,'' they are ``too-big-to care.''
    [The prepared statement of Mr. Duncan can be found on page 
144 of the appendix.]
    Mr. Gutierrez. We are now going to go to the question 
portion of this hearing.
    This is quite an educational process. And I think that of 
everyone who has testified, I want to figure out a way that we 
help out Mrs. Miller from Vermont and her store and her family 
business. She seems to have made--not that the rest of you 
didn't make compelling arguments, but the most compekking 
argument.
    Is there anything else you would like to add, something 
that you didn't have time for in your 5 minutes?
    Ms. Miller. Not really, just maybe a few things. I know 
they keep talking about cash discounts and credit and that kind 
of stuff. Maybe in a bigger store where you scan, that wouldn't 
be an issue. Well, mom and pop stores, as long as I own the 
store--I have been there for 26 years--I never going to have a 
scanning system. It is all manual. That would be an absolute 
nightmare as far as the storekeeper and employees. I was given 
a copy of what the rules were as far as discount and point of 
sale, and I don't understand them. I would be more than glad to 
share it with you. It talks about setting a standard price, and 
it is just kind of gibberish to me.
    Mr. Gutierrez. We want to see what we can do to make sure 
we keep businesses such as yours--
    Ms. Miller. Keep it simple.
    Mr. Gutierrez. Right, keep it simple and keep it 
understandable and keep it in business.
    Ms. Miller. And the big thing with Congressman Welch's bill 
is--I haven't been out of Vermont very often, but a lot of our 
stores do have minimum setup, $5, $10, whatever. And I guess 
that is what I am looking for is the flexibility to be able to 
do that. I am not discriminating against a sale, I am not 
saying you can use this card, you can use that card, but that 
definitely would help us.
    My examples with the potato chips and the gum, that is 
real. It happens every day of the week.
    Mr. Gutierrez. I will never walk into a mom and pop grocery 
store in my neighborhood--
    Ms. Miller. But we want them to walk into our store. Don't 
drive by and get your big pack of gum at Wal-Mart.
    Mr. Gutierrez. I will go hungry before I use a credit card 
after your example today. I mean that sincerely. It is 
outrageous what happens.
    Ms. Miller. I am on Route 12, and we are 23 miles from 
Montpelier, our State capital, and we are near Stowe, the ski 
capital of the East. So people are on their bicycles, and they 
have a piece of plastic in their back pocket. And I want them 
to come into my store, so that would definitely help me. They 
might walk out with an Elmore Store T-shirt on, and they won't 
have to carry it, they can do that.
    Mr. Gutierrez. I get it.
    Ms. Miller. Other things I know, like when I testified in 
front of Senator Leahy's committee, they talk about litigation. 
And I am not part of the litigation, I don't understand the 
whole situation, but that has been going on for years. Small 
retailers can't wait years and years and years for more change.
    And they talk about the monthly fees. I don't know what my 
monthly fees are until I get my bill. Number one, I still get 
one in the mail because I am an old-fashioned girl. I like 
paper and pencil, and I use my computer because my bookkeeper 
makes me do it, but I still do all my own stuff. But I don't 
know until the end of the month what is getting taken out of my 
checking account.
    Mr. Gutierrez. So there is the end of the month, and there 
is this--
    Ms. Miller. It is like, whoa. July and August is a busy 
time, and $600 a month is a lot out of a small store. So you 
have to have that in your checkbook, and it is just like--it is 
huge, and you don't know what it is, but you have to be 
prepared.
    Mr. Gutierrez. What we will probably do is, we will 
probably be in touch with you just to get more examples from 
you and others like you.
    Ms. Miller. And one more small example, and I don't mean to 
interrupt you.
    Mr. Gutierrez. Absolutely.
    Ms. Miller. Two months ago, all of a sudden, I got a three-
page letter saying I had to either say yea or nay to an $8.95 a 
month fee for breach of security insurance. And I figured that 
was covered by my home or my store insurance policy. So I 
called my local insurance company in Montpelier and they were 
like, gee, that is a really good question. It took her probably 
a week to get back to me and she said, you are not covered. So 
there is another $8.95 a month. So you never know what is going 
to come from where.
    Mr. Gutierrez. Well, what we will do is we will make sure 
that we have a conversation. We have your testimony, but we 
will have a further conversation. I know Congressman Welch will 
work on making sure that happens because there is a lot of eye 
opening information here at this hearing.
    I know that in my neighborhood, I guess you pay one price 
for gasoline if it is cash and another price if it is a credit 
card, except it doesn't happen in every neighborhood in 
Chicago. It is only in certain neighborhoods in Chicago this 
happens, where there is a duality of prices for gasoline.
    And the other thing, the big retailers. I went to a big 
retailer, and they have a sign that says, ``Use your debit 
card, we will give you 3 percent back.'' Guess what I did? I 
used my debit card because I have cash in my debit account, and 
they gave me 3 percent back and I was happy to get it. You 
can't do that.
    Ms. Miller. No.
    Mr. Gutierrez. It is unfair.
    Ms. Miller. And when somebody walks in my store, I don't 
want to treat people differently. Everybody should be on a 
level playing field and be treated the same.
    Mr. Gutierrez. We are going to try to do that, Ms. Miller. 
That is going to be our intent.
    Ms. Miller. Thank you, I appreciate your time.
    Mr. Gutierrez. You have Congressman Welch on the committee. 
We will be talking to him some more.
    Thank you so much.
    Mr. Gutierrez. Congressman Hensarling, you are recognized 
for 5 minutes.
    Mr. Hensarling. Before I get into my line of questioning, I 
have a statement here from the Financial Services Roundtable in 
opposition to both bills. I would ask unanimous consent that it 
be entered into the record.
    Mr. Gutierrez. Hearing no objection, it is so ordered.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Indeed, Ms. Miller, you give very compelling testimony. I 
have heard from a number of very small retailers in my district 
in Texas, but I am still trying to figure out exactly who is 
``David'' and who is ``Goliath'' in trying to figure out the 
public relations battle. Is it a battle between your little 
grocery store versus Visa? Or is this Wal-Mart versus Liberty 
Bank, a community bank that I assume serves a lot of low-income 
and minority people in the Ninth Ward of New Orleans. I am not 
so certain that it is easy to discern who is ``David'' and who 
is ``Goliath'' here, nor do I necessarily think that is a good 
way to legislate.
    I guess the question I have here--and Mr. Duncan, I don't 
have all of your written testimony here in front of me, but did 
I hear you make a declarative statement that the payment 
systems of Visa and MasterCard violate our antitrust laws?
    Mr. Duncan. Yes, you did.
    Mr. Hensarling. If so, why are we here? Why haven't the 
courts already acted?
    Mr. Duncan. Well, the courts actually, Congressman, have 
acted in some instances. The Justice Department brought a case 
against Visa and MasterCard for another set of rules, which was 
the exclusionary rules.
    Mr. Hensarling. There again, we have antitrust laws on the 
books. If these companies have violated them, I would assume 
that the practices of which you complain about today, would 
have already been fined and received cease and desist orders. 
So are you saying in some cases yes, in some cases no?
    Mr. Duncan. I am saying litigation takes years, antitrust 
litigation takes years, and, unfortunately, antitrust 
legislation is backward looking. So a decision the court makes 
today covers what happened--
    Mr. Hensarling. Well, I am anxious to see the rulings of 
the courts, but my guess is that reasonable minds may end up 
disagreeing.
    Mr. Duncan, my guess is there are very practical 
impediments, barriers to entry, in this market, but are there 
legal barriers to entry for people setting up a new payment 
card system? Listen, I know it is a capital-intensive business, 
but so is the airline business. New airlines have been created 
in the last few years. So why don't you all get together and 
create your own credit card network?
    Mr. Duncan. Well, there are, as you have mentioned, 
practical barriers to entry in this market. The two cards, Visa 
and MasterCard, have 85 percent of the market.
    Mr. Hensarling. I understand the practical barriers. Are 
there legal barriers? If so, I would like to work on them; I 
believe in more competition as opposed to less. Are there legal 
barriers of entry that you would like to make this committee 
aware of?
    Mr. Duncan. I am not sure that there are legal barriers to 
entry that are necessarily within the jurisdiction of this 
committee.
    Mr. Hensarling. Well, let me ask you this: I assume that 
your members believe they do receive some value in these 
payment systems. For example, the ease of the payment, you 
don't have to worry about the bounced checks. I assume you have 
a fairly sophisticated antifraud network.
    What we are discussing now is the price that I think I 
heard either you or Ms. Miller describe as either abusive or 
unfair. So you do acknowledge you get some benefits, we are now 
debating whether or not the price is fair. Is that--
    Mr. Duncan. There are benefits to cards in some instances, 
yes.
    Mr. Hensarling. And so, again, the complaint here is the 
price. But how does this differ from if your rent goes up, your 
utilities go up, your payroll goes up, your insurance premiums 
go up? All of that comes into the base price of your item. 
Sooner or later, it gets pushed off onto the consumer and you 
ostensibly are trying to make a profit. So how is interchange 
somewhat unique from every other cost that your membership 
deals with?
    Mr. Duncan. Actually, that goes to the very first point you 
raised as to who is the ``David'' and who is the ``Goliath'' 
here. The difference is, it is not a question between the 
Elmore Store and a large bank; the debate is between open 
competition and privately regulated markets. Visa and 
MasterCard--
    Mr. Hensarling. Well, it sounds like it could be open 
competition if we don't have legal barriers to entry.
    I see that my time is starting to wind down. I am also 
curious about--I guess I will ask this as a rhetorical 
question--the ability of retailers to deal in cash only. I can 
tell you right now, I just had a son turn 6 years old, and his 
birthday cake was purchased from Casa Linda Bakery in Dallas, 
Texas. They only take cash, and they have been successful for 
decades and decades.
    Mr. Duncan. I guess the last point would be that all these 
other items you mentioned--the rent, the utilities--we can 
either negotiate or control them. We cannot control 
interchange.
    Mr. Gutierrez. Ms. Miller, I see you are over there trying 
to get in a word edgewise. I ask unanimous consent that Mrs. 
Miller has 30 seconds.
    Ms. Miller. Thank you.
    Do we have any control? No. When I take somebody's card, I 
have that equipment in front of me, and I swipe the card. It is 
through my local bank--I choose to use my local bank because of 
the technical support. Does it cost me a little bit more? Yes. 
But I am in a rural area. If I have an issue, I can make a 
phone call 24-7. I have a real person who can help me out.
    As far as your payroll, payroll is something you can 
control. That is why it is Cathy and Warren at the Elmore 
Store. I have two part-time employees and I employ three high 
school students.
    Rent, utilities. You bring in the natural cooler systems. 
We were actually the first one--
    Mr. Gutierrez. Your 30 seconds is up, Ms. Miller. I am 
sorry.
    Senator Duplessis?
    Ms. Duplessis. Thank you, Mr. Chairman.
    I would like to just make a few comments to clarify some of 
the issues that Ms. Miller suggested.
    First, I would like to also invite her to be a customer of 
Liberty Bank, because obviously, the bank that you are dealing 
with is not giving you the best deal.
    At the end of the day, every merchant has a depository 
account. That is where the money flows. And so the relationship 
that a merchant has with its banker is what causes the 
negotiation. Every day, when I look at my merchant accounts, we 
look at total relationships and we negotiate their fees.
    Mr. Gutierrez. Thank you.
    Congresswoman Waters, you are recognized for 5 minutes.
    Ms. Waters. Thank you very much. Let me welcome all of our 
panelists here today, and thank you for coming.
    You are here at the Congress of the United States at a very 
interesting time.
    What I am gleaning from the testimony is that two of the 
organizations that I have fought very hard for, the credit 
unions and minority banks, are kind of caught in an unusual and 
difficult situation. First of all, many of us are just at this 
time very unhappy with the major banks in this country. We have 
bailed them out. They have tightened the credit on everybody, 
individual consumers. And I am particularly concerned about 
these exchange fees or interchange fee--what do you call them? 
Interchange. I remember testimony that came from one of the 
panelists here--Mr. Mallory Duncan, weren't you before the 
Judiciary Committee?
    Mr. Duncan. I was.
    Ms. Waters. And at that time, I thought there should be 
some real concerns about antitrust and collusion based on your 
testimony. I don't know what is happening over in that 
committee, but I am going to direct my staff to pay attention 
to that aspect of this.
    Let me just say particularly to our credit unions and 
minority bank panelists, there has to be some changes made in 
the way that these fees operate now. I understand the problems 
that you are presenting to us today, but the overall problems 
and the abuses just trump the problems that the minority banks 
and the other companies are having.
    So what I am going to do is work with the authors of this 
legislation to see if I can address some of your concerns as we 
make the changes that need to be made, but it cannot stay the 
same.
    I just don't understand, merchants are forbidden to impose 
a surcharge for the use of payment, credit or debit cards, 
under the no surcharge rule. Merchants are required to take all 
credit cards bearing the card association brand on our all 
cards rule. They are required to accept these cards at all 
outlets. Merchants are prohibited from offering discounts to 
particular types of cards. The nondifferentiation rule. Who 
made these rules? Where did these rules come from?
    Mr. Miller. Isn't it Visa and MasterCard?
    Ms. Duplessis. No. May I make a response to that?
    Ms. Waters. Sure. Yes, please.
    Ms. Duplessis. I think some of the issues that you brought 
up are inaccurate. First, that there is no charge or difference 
that Visa or MasterCard requires for cash or credit. The second 
thing is, imagine you are shopping or you are going to make a 
purchase. This bill would allow credit merchants to change at 
their will who and what type of credit card they will accept. 
So today, you walk in Target or Wal-Mart or Saks, and you have 
a credit card that you typically use. Tomorrow, Saks may say 
they don't accept that.
    Ms. Waters. But excuse me, if I may. That has always been 
the way that credit cards worked in this country. I have credit 
cards that cannot be used. It didn't just start yesterday. And 
it still goes on all over the country. So what is different?
    Ms. Duplessis. It is the networks. Your merchant can decide 
whether it will accept Visa, MasterCard, Discover, American 
Express, or any of the other credit card companies. They can 
decide which one of those companies they will accept. But if 
they decide to accept the Visa, MasterCard, Discover, American 
Express, then they have to accept all cards using that logo, 
that network. The difference here is, they can say I accept 
Visa, MasterCard, but I only accept this type of card that 
Visa, MasterCard uses.
    Ms. Waters. But this is a rule that was basically developed 
by the big credit card people.
    Ms. Duplessis. No, this is what his bill would do to us. It 
would change the ability for that consumer--if I have a Visa 
card and I decide--and ``X'' merchant accepts Visa, then I can 
use any type of Visa card that I have, whether it is a rewards 
card, an affinity card, or any type of card at that store to 
make a purchase. If this legislation passes, that store may 
say, we accept Visa or MasterCard, but not that particular 
issuer. That is the dangerous part. And that is the part that 
would create a very uncertain, very inconsistent--
    Mr. Gutierrez. Your time has expired.
    I ask unanimous consent that the National Association of 
Convenience Stores and the Society of Independent Gasoline 
Marketers of America; the Electronic Transactions Association; 
the Independent Community Bankers of America; the National 
Black Chamber of Commerce; the Blackhawk Network; the Honorable 
Betsy Markey; and the American Bankers Association all have 
unanimous consent for their statements to be included in the 
record.
    Hearing no objection, it is so ordered.
    And next we have the ranking member, Mr. Bachus. You are 
recognized for 5 minutes, sir.
    Mr. Bachus. This interchange fee is a serious issue. I 
think most of the members are trying to study it and make a 
judgment. But my remarks are going to be on something else.
    Mr. Mierzwinski, you made the remark--and I think it was in 
connection with implementation of the new credit card bill--
that you believe the banks are behaving badly?
    Mr. Mierzwinski. That is correct, sir.
    Mr. Bachus. I know Congresswoman Waters says that she and 
her colleagues are very upset with most of the big banks. I 
think you would admit that is a broad generalization of all 
banks.
    Mr. Mierzwinski. Well, I think that in the credit card 
market, as you know, Mr. Bachus, the credit card market is 
extremely concentrated, there are just a few banks. According 
to studies that will be discussed in the second panel by some 
of my consumer colleagues, all of the big banks are either 
raising interest rates dramatically, raising minimum payments, 
jumping on consumers with massive changes to their cards. And 
so if the credit unions aren't doing it, that is great, but 
they have such a small part of the market.
    Mr. Bachus. Well, let me say this; we passed credit card 
legislation that increased their cost--I think we all would 
accept that--and it exposed them to risks that they didn't have 
before. And I think at the time we debated it, there were 
pretty broad statements by both the industry and by Members of 
Congress that this was going to result in--that they were going 
to have to raise the rates in many cases, that they were going 
to have to restrict credit in many cases. In fact, I read 
studies at the time that said they may have as many as 25 
percent of the folks who were extended credit probably may be 
denied credit cards going forward depending on how it was 
implemented.
    So I don't think it should come as a shock to any of us, 
including consumer groups, that they are raising rates and they 
are limiting their exposure. In fact, I would submit, if they 
made any mistakes--and they did over the past several years--it 
was overextension of credit, giving credit cards to people who 
probably should not have had them, giving them too much credit. 
And they have taken tremendous losses on it. And their costs 
are going up. They don't escape a bad economy.
    I am just saying that I think of everything we do here, 
that we don't approach this from the banks are behaving badly. 
I understand your frustration, but I can say that it could have 
been predicted that people were going to be getting notices 
that their rates were going up because--yes, and some of the 
changes I think were good, but it was also very predictable 
that it was going to cost more because somebody has to pay for 
it.
    Mr. Evans, let me shift gears and ask you a question. You 
did a recent University of Chicago study on the Consumer 
Financial Protection Agency, as it is so called?
    Mr. Evans. Yes, that is correct.
    Mr. Bachus. You state that under conservative assumptions, 
that legislation would increase interest rates consumers pay by 
at least 160 basis points, reduce consumer borrowing by at 
least 2.1 percent, and reduce net new jobs created in the 
economy by 4.3 percent?
    Mr. Evans. Those are the findings, yes, sir.
    Mr. Bachus. And that is conservative, right?
    Mr. Evans. Certainly, the first two are.
    Mr. Bachus. Okay. 160 basis points? You said what now?
    Mr. Evans. The first two statements you said, the 160 basis 
points, that is conservative.
    Mr. Bachus. Conservative. That it would raise interest 
rates by that amount and reduce consumer borrowing by at least 
2 percent?
    Mr. Evans. That is correct.
    Mr. Bachus. What effects would that have on our economy?
    Mr. Evans. In the long run, it would have a terrible effect 
on the economy. And remember, the CFPA is a very onerous and 
very intrusive form of regulation. So in the long run, my 
belief and the result of the study is it would have a serious 
effect in terms of the access that consumers and, very 
importantly, small businesses will have to credit.
    In the short term, I think it is particularly problematic, 
the CFPA, and the reason it is particularly problematic is it 
creates an enormous amount of uncertainty for lenders, imposes 
a lot of potentially very high costs on them, and I think in 
the short term the result of the passage of the CFP Act in its 
current form would have a very serious effect on access to 
credit and a negative effect on the economy.
    Mr. Bachus. And those were conservative assumptions. I 
can't imagine if--
    Mr. Gutierrez. The time of the gentleman has expired. We 
are going to recess. We have some votes, and we will be back 
right after the votes.
    [recess]
    Mr. Watt. [presiding] The Chair has asked me to continue 
the process. I was the next in line to ask questions anyway, so 
we will consider the hearing reconvened and I will yield myself 
5 minutes as soon as we find somebody who can operate the clock 
for us.
    Let me just make a couple of comments in my 5 minutes of 
time. I am one of those people who has the luxury--or the 
curse--of serving on both the Judiciary Committee and the 
Financial Services Committee. And I think I got some 
appreciation during the last term of Congress of how 
complicated a subject this whole interchange fee issue is over 
in the Judiciary Committee when there was an effort made to 
solve the retailers' problem by allowing them to band together 
and disregard the antitrust laws as a counterweight to the 
power of the industry on the other side. I didn't think that 
was a reasonable solution, not because I didn't think probably 
that there were some problems that needed to be addressed, but 
I just didn't think that was the appropriate solution. It was 
the only solution that the Judiciary Committee could really 
fashion within its jurisdiction since it has jurisdiction over 
the antitrust laws, but that didn't necessarily make it an 
appropriate solution to the problem.
    There are multiple players here. The one thing I found out 
is that there are retailers, there are banks, there are credit 
card companies, there are credit unions who, despite the fact 
that they issue credit cards, have a slightly different 
position sometimes than the banks, and of course there are 
consumers. So I identified at least five different interests 
that have to be taken into account during my evaluation of this 
in the Judiciary Committee.
    I think today's hearing actually is a very productive thing 
because one of the concerns I had about what we were doing in 
Judiciary was that I didn't think we had enough hearings for 
people to understand the relative interest of those five and 
potentially other parties to this discussion. And while we 
don't ever understand completely the totality of nuances and 
facts and different circumstances in any area that we legislate 
in, I think we do better legislation the more we understand 
about the various interests that people have in it, and we have 
at least then the capacity to try to balance those interests 
from a public policy perspective. So that is kind of the way I 
am approaching this. I think this is a valuable hearing because 
it adds to the level of knowledge that we as members of the 
committee have to try to fashion a solution.
    Now, having said that, the question I would raise I guess 
is this; we did a credit card bill on the consumer side that 
constrained certain kinds of conduct vis-a-vis consumers. Is 
there anybody who thinks that some kind of legislation on the 
other side that has the potential to impact consumers through 
interchange fees is not an appropriate exercise? Is there 
anybody on this panel who believes we should be doing nothing? 
Just raise your hand if you believe we should be doing nothing.
    Ms. Duplessis. I do.
    Mr. Watt. Tell me why you think we ought to be doing 
nothing.
    Ms. Duplessis. I am not going to say that I believe that we 
should be doing nothing--
    Mr. Watt. Okay. Well, then you are not going to be 
responsive to the question I asked. I didn't ask what we ought 
to be doing, I just asked is there anybody who believes we 
ought to be doing nothing.
    Is there anybody who believes--and my time is running out--
who believes that we shouldn't at least be taking a look at the 
interchange fee side of this equation in the interest of 
consumers and all of the parties as we did on the other side 
when we addressed--maybe not the same way, but some kind of 
framework on the interchange side of this equation? Does 
anybody think we shouldn't be at least exploring that 
possibility?
    Mr. Caverly. I just want to make a comment.
    Mr. Watt. Mr. Caverly is getting ready to make a comment. I 
am not sure it is in response to my question, but go ahead.
    Mr. Caverly. I think there is a danger in getting involved 
in regulating interchange fees.
    Mr. Watt. There is always a danger in everything we do, I 
understand that. But my impression, to be honest with you, is 
that there is so much inconsistency out there, and that this is 
an area that at least we need to be looking carefully at. I am 
not sure that I have decided what the solutions ought to be. I 
am not sure I even understand all of the problems that exist; I 
am just trying to get a basic understanding.
    But my time has expired. I used most of it making my 
opening statement. So I am going to go on to Mr. Sherman from 
California for 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman.
    We have dealt with this same issue in Judiciary where the 
proposed solution was to deal with antitrust law to allow 
retailers to get together and bargain. Over there, what I 
suggested was, what if we limited to retailers with 500 or 
fewer employees. And my concern then was that the proponents of 
dealing with the interchange fee paint this picture, and I 
don't have to describe the picture that well, it is actually 
the same picture that is on Cathy Miller's report, and that is 
a picture of a small store. And they say we have to help the 
small store. And then I proposed an amendment that would limit 
it all the way up to 500 employees, and the proponents of the 
bill beat the amendment.
    Why, Mr. Duncan, do we not simply address the picture that 
is being painted, which is that the small stores aren't being 
treated well? Why do we need to help WalMart?
    Mr. Duncan. Well, it is not a matter of helping WalMart or 
the small stores solely. The problem is we have a market that 
is not working, as we discussed in Judiciary. And if we believe 
that competition is good for all merchants, all banks, and all 
consumers, then we need to remove fetters on competition for 
everyone.
    Mr. Sherman. I understand the theory. But if WalMart's 
costs go down, does that mean they charge me lower prices or 
make higher profits? And if the interchange fee is less, does 
that mean that I don't get my miles? The point here is that the 
credit card companies are competing. They are competing to try 
to get as many cards in people's hands as possible. Sometimes, 
that is a problem in that they extend credit that people can't 
afford to pay. They have been jolted out of doing that. They 
may be going too much in the other direction.
    But right now, the stores have to pay a lot. And the cards 
compete for business by giving me free miles. Why should I lose 
my free miles so that WalMart's costs go down? How certain am I 
that WalMart is going to pass that savings on to me?
    Mr. Duncan. Well, let me try to explain how the savings 
works. Obviously, every merchant, if this were to pass, would 
pass the savings on in a different way. Let me explain how that 
works. Merchants compete for market share. And if you are in a 
market that favors low-cost products, you want to grow that. So 
what you will do--
    Mr. Sherman. Sir, I am in a market that favors high profits 
and big dividends. So I will shop at the stores in my area. I 
am not going to get lower prices. I am not going to get a 
cleaner store. I am just going to see that WalMart's dividends 
per share go up. How does that help me?
    Mr. Duncan. If in fact--let's take two stores competing, if 
they are in the cost-sensitive market. If one of them is 
returning the costs and the other isn't, as I said in my oral 
testimony, the one that is returning the costs grows their 
market share.
    But you could have a different scenario. You could have a 
high-end store which says--I will use Nordstrom as an example, 
and they don't compete on price, they compete on service. And 
so they will provide more of what their customers want in terms 
of more service because that is how they--
    Mr. Sherman. You are assuming that retailing is such a 
competitive market that every savings is passed forward to 
consumers. And I am telling you about a different area, where 
in fact it isn't so competitive, and the lower costs translate 
into higher dividends for shareholders. If the image you are 
trying to paint in favor of this bill is a small store, I would 
think we would want to limit it to small stores.
    But I want to ask one other question. Why not simply solve 
this problem by giving me a 1 percent discount for paying cash? 
Why won't your members do that for me?
    Mr. Duncan. There are two questions there. One of them is, 
do the card companies put up barriers to us providing discounts 
for cash? And they have put enough barriers in place that most 
retailers can't do it. A few can. That is the quick answer to 
that.
    Mr. Sherman. What are these barriers and why can some 
retailers jump over them in a single bound and others are 
constrained by gravity? I have been told by the other side that 
all your members are just free to give me a cash discount. They 
don't, for their own marketing reasons.
    Mr. Duncan. No, that is not accurate.
    Mr. Sherman. What if we simply prohibited all barriers to 
giving a discount for paying cash?
    Mr. Duncan. That is an excellent idea, and in fact that 
idea was proposed in the other body by Senators Durbin and 
Bond, and the banks screamed bloody murder that we might pass 
the savings on to consumers, so they tried to block it.
    Mr. Sherman. I will for the record ask Mr. Caverly to 
respond to that and see if he screams bloody murder about that. 
I yield back.
    Mr. Caverly. As a follow-up to that statement, I believe 
the merchants already have the ability. Irrespective of any new 
legislation, merchants can provide a cash discount under the 
current rules. And back to the question, there has been a lot 
of discussion about consumers and how the consumers are going 
to benefit.
    Mr. Sherman. My time has expired.
    Mr. Watt. [presiding] The gentleman's time has expired. The 
gentleman from New York, Mr. Meeks, is recognized.
    Mr. Meeks. Thank you, Mr. Chairman. And I have been 
listening to the hearing in my office, and I am not sure--I 
heard Mr. Scott's opening statement. And I kind of agree with 
him, because I have constituents on both sides. And so that is 
why I have been listening with a lot of intent.
    But let me just ask a question, I think that Mr. Sherman 
was asking to Mr. Duncan, and just say, what if we included in 
this bill language that said all savings from this bill had to 
be passed through to customers, and they had to be posted 
transparently so that they could ensure you are not simply 
extracting margin from credit card companies to pass through to 
individual retail companies? Would you have any objection to 
that?
    Mr. Duncan. Sure. Absolutely.
    Mr. Meeks. You would have an objection?
    Mr. Duncan. I would have an objection because you would 
simply be substituting one restraint, the restraints they put 
on us now as to how and when we can offer discounts, for a 
different set of restraints as to how we would have to accord--
    Mr. Meeks. Let me go on that because it seems on the one 
hand, someone is saying this is going to save the consumers 
some money. And if it is going to save the consumers--that is 
the reason--then it seems to me it should not be a problem in 
posting, well, this is how we are saving you some money. And as 
a result, the money is not going back into our pockets, this 
money is going to consumers.
    Mr. Duncan. I see what you are saying. Let me say it a 
different way. As I was just saying to Mr. Sherman, different 
stores will respond depending upon their particular market. So 
one store might decide, for example, that we are going to give 
you free gift wrapping if you use a cheaper form of payment. 
You use a debit card, you use cash, we will give you free gift 
wrapping. That is a savings to the consumer, but it is not in 
the same way as a dollars savings that you would see.
    Mr. Meeks. I want to ask you that in a second, but I want 
to go just about another concern because we only have these 5-
minute interviews here. But Ms.--I hope I am pronouncing your 
name correctly--``Duplessis?''
    Ms. Duplessis. ``Duplessis.''
    Mr. Meeks. ``Duplessis.'' Senator Duplessis. I was 
listening to you also. Here is one of the concerns that I have 
about unintended consequences. And I think this is what you 
were getting at, I just want to make sure, about reducing 
access to credit. And especially it is important at this time 
when our economy is in the most need, and generally I think 
people utilize their credit cards more as they spend more 
money.
    And I think what your testimony--based upon your testimony 
this morning, I am concerned that it will further have a 
disproportionate impact on access to credit, especially for 
minorities and people of color and others who are already--
basically, those people who are already on the margin of being 
able to have access to credit. Can you share your thoughts on 
that?
    Ms. Duplessis. Yes. You are right on target with what we 
are talking about when we say that there could be some 
unintended consequences. But in addition, on the merchants' 
side, when we talked about unintended consequences that they 
are not factoring into this equation, we are talking about the 
issue that cash is not a cheaper form of payment. Cash is 
perhaps a more expensive form because that merchant, by using 
electronic payments, that merchant now does not have to pay for 
the transportation of that cash. That merchant, while that cash 
is sitting in their cash register, it is not earning interest 
for them. When they are using an electronic form of payment, 
that cash is deposited in their accounts immediately. So that 
merchant has immediate availability to reinvest those dollars.
    We have not even talked about the money that they are 
making as a result of being able to have immediate availability 
of cash. In addition, they do not have courier expenses, which 
goes to the bottom line. That is a cost savings for being able 
to accept electronic payment.
    Mr. Meeks. Let me ask Mr. Duncan. I am sorry I am cutting 
you off, because I see my time is about up. But I heard in his 
testimony or read in his written testimony that he said debit 
cards are plastic checks. Who is responsible for collecting the 
payment in the case of a bounced check? And I thought that is 
the retailer. As opposed to, in the case of a credit card or a 
debit card, isn't it the bank or the credit card company that 
is behind it? Is that not correct? And so therefore, I am 
wondering, are there good estimates of the cost burden that 
collections on bounced checks imposed on retailers before 
credit and debit cards became the predominant form of payment?
    Mr. Duncan. There have been a number of companies who have 
looked into that. And I hate to disagree with the senator, but 
in fact the cost of accepting cash is a fraction of the cost of 
accepting credit cards or debit cards, a small fraction. 
Checks, we have found, cost us virtually nothing in comparison 
with the cost of taking debit cards or credit cards.
    Let me just put it a simple way: It doesn't cost any more 
to carry a $10 bill to the bank than it does to carry $1,000 in 
bills to the bank.
    Ms. Duplessis. Yes it does, sir. As a banker, there are 
things called analysis charges. And every bill that you deposit 
into a bank, there is a charge for handling that money.
    Mr. Duncan. Let me say that a $1 bill versus a $100 bill.
    Ms. Duplessis. Okay.
    Mr. Green. [presiding] Excuse me, friends. While we are 
enjoying the debate, the chairman expects us to move along. We 
have another hearing that will take place here at 2:00 today.
    Mr. Scott of Georgia is now recognized for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman. Could you all tell me 
why the interchange fees have been rising so? Particularly with 
some of the technological changes that are being made, why have 
they been rising so fast?
    Mr. Caverly. The fee itself as a percent of the transaction 
has not risen. That fee as a percentage has stayed relatively 
flat over the last decade. What you are seeing, though, is an 
increased use of plastic cards as a form of payment, an 
increase in sales volume associated with the use of debit and 
credit cards. But the fee itself as a percentage has remained 
relatively flat.
    Mr. Mierzwinski. Mr. Scott, if I could just respond. It is 
a time when it should be declining; because of the cost of 
providing the product, it should be declining, not staying 
flat.
    Ms. Duplessis. Actually, the costs of providing the product 
has escalated, because we now have other issues to contend 
with, fraud and those types of issues, breaches in card 
security that sometimes the merchant doesn't have the necessary 
infrastructure to stop card breaches. And so those costs are 
borne by the bank and the issuing card carrier, holder, because 
we now have to try and handle those issues that the merchant 
doesn't bear.
    Mr. Scott. But isn't fraud going down?
    Ms. Duplessis. No, not at all. It is getting worse.
    Mr. Caverly. We also have to contend on an ongoing basis 
with data breaches. And in late 2008, early 2009, there was a 
data breach at a merchant processing company, and that caused 
our credit union to reissue about 50,000 new cards at a cost of 
$150,000. So there are ongoing costs.
    Yes, I understand the theory is the payment system is in 
place, but there are ongoing costs, and they are escalating.
    Ms. Miller. Sir, if I could interrupt whenever you are 
ready?
    Mr. Scott. Yes.
    Ms. Miller. In my small store, in my situation I go to the 
bank. We do daily deposits. I deposit cash. It doesn't cost me 
money to deposit cash. It doesn't matter if I put in $1 or I 
put in $1,000. If I deposit a check that I decide to take from 
a consumer, it costs me 15 cents to deposit their check into my 
banking account. So if a customer writes me a check for $1.35 
for a bottle of water, I pay 15 cents.
    If they decide to ask my husband Warren for $200 cash back, 
I have to go somewhere, it costs me 15 cents. If the person 
uses their debit card, their credit card in my store, it costs 
me 20 cents every time I swipe that card, plus my transactions 
fees, which I find out at the end of the month.
    And I beg to differ--maybe in Mr. Caverly's situation, he 
says fees haven't gone up--but my fees have gone up. And since 
I testified in 2006, credit card usage has gone up over 50 
percent in our store. People are using plastic. I want to be 
able to take it. I don't want to discriminate against my 
customers. I don't want to say, okay, you are giving me cash, 
this is going to be your price.
    We are a small operation. We don't scan. And it would just 
be a major nightmare. And I would suggest if you removed any 
barriers, give us a chance to give a consumer a discount or a 
free product for any type of payment.
    Ms. Duplessis. Sir, can I read a statement from Visa and 
the rules with regards to surcharging?
    Mr. Scott. Sure, go ahead.
    Ms. Duplessis. If I may. It says: ``Always treat Visa 
transactions like any other transaction. That is, you may not 
impose a surcharge on a Visa transaction, but you may, however, 
offer a discount for cash transactions.''
    So I don't understand why we keep saying that Visa or 
MasterCard doesn't allow merchants to charge a discount for 
using cash. It says it directly in the agreement between the 
merchant.
    Ms. Miller. I am not saying--okay. Go ahead.
    Ms. Duplessis. Would you like this?
    Ms. Miller. I am not saying that is not true. I know I 
can't add a surcharge to my consumer.
    Ms. Duplessis. You have been saying all along that you 
can't.
    Mr. Scott. All right.
    Ms. Miller. No, I am saying I can do a cash discount, but I 
don't want do a cash discount.
    Ms. Duplessis. You don't want to do a cash discount. That 
is different than not being able to.
    Mr. Green. The member is in control of the time. Mr. Scott.
    Mr. Scott. I have 5 minutes. And now some of that is gone. 
But if you do, just allow them to come through me. This is good 
give-and-take. This is exactly what we need.
    Let me ask a couple of questions about our credit unions 
and smaller banks. How can reasonable rates be established so 
that some of the smaller community banks and credit unions can 
continue to offer credit services for their customers?
    Ms. Duplessis. It is all about relationships, sir. If I 
have a merchant who is banking with Liberty Bank, that merchant 
is based on the number of relationships or the type of 
relationships they have with me, i.e. their personal accounts, 
a loan, other types of products, then I can in totality look at 
those relationships and negotiate their fees and as well as 
their interchange fees.
    So this notion that merchants and retailers can't negotiate 
interchange fees is just false. We do it all the time. But it 
is based on a relationship that individual small retailer has 
with their bank.
    Mr. Green. The time has expired, Mr. Scott. We will have to 
get the question for the record. Thank you.
    Mr. Moore is recognized for 5 minutes.
    Mr. Moore of Kansas. Thank you. Mr. Caverly, while some may 
be more concerned with large firms like Visa or WalMart in this 
debate, I wonder how this interchange proposal will affect 
small businesses who need access to credit: community banks and 
credit unions, as well as small merchants who are competing 
against large retailers.
    As you know, our financial system remains fragile. And I 
hear from small businesses in Kansas that have lost access to 
credit, or they see their credit line slashed, if there is a 
dramatic change in interchange rules today, what effect would 
it have on credit unions and community banks?
    Mr. Caverly. The effect would be significant. Kind of going 
back to this specific bill with the honor-all-cards rule, I 
think that would create mass confusion for our consumers, for 
our members, to not have the confidence that when they walk up 
to a merchant and see the Visa sticker on the door that their 
card will be honored or accepted.
    But with respect to a reduction in interchange fees, there 
is a cost, there is an ongoing cost to offering these card 
programs. And in this discussion--the question of what would 
happen if interchange fees are reduced is not an academic 
question or an academic discussion. We can look at what 
happened in Australia when the government did step in and 
reduced interchange fees. The merchants received to the tune of 
about $900 million a year in benefit. That benefit was not 
passed on to consumers. What did happen, though, is many small 
issuers, perhaps like a credit union or a small community bank, 
were forced out of the market. But ultimately, consumers ended 
up paying more because now to replace that loss in interchange 
income, the issuers had to begin charging fees, annual fees for 
cards, higher annual fees for rewards programs.
    So I think ultimately that is the impact. Significant 
impact on the credit union, but more importantly a significant 
impact on our membership and consumers.
    Mr. Moore of Kansas. Senator Duplessis, do you have any 
additional comments?
    Ms. Duplessis. No, I think he basically hit the nail on the 
head.
    Mr. Moore of Kansas. Thank you. In today's economy, Ms. 
Miller, would sweeping changes to interchange rules help or 
hurt small retailers? And would you be concerned these small 
retailers would lose access to credit?
    Ms. Miller. Yes, it would help us. I don't believe that we 
would lose access to credit or to the use of it. It has just 
become so predominant in our world today, if the consumer wants 
it, it is going to happen.
    The big thing, when I testified earlier, is just if we 
could set up a minimum, like Congressmen Welch and Shuster have 
proposed in this bill, it would be a godsend to small 
businesses. Because--like my examples with the gum, my examples 
with the potato chips, a bottle of water. It is real and it 
happens every day. So yes, it would help us, sir.
    Mr. Moore of Kansas. Okay. Thank you. I am aware the 
Government Accountability Office, GAO, is working on a report 
they will release soon on interchange fees. But looking at the 
report they wrote last year on the impact of interchange fees 
on the Federal Government, the GAO found that in countries that 
have rolled back interchange fees to less than 1 percent of 
transactions, consumers did not necessarily reap the benefits.
    I don't know if there is a lot of interest in simply 
transferring profits from one industry to another, but why not 
require all savings from interchange fees be automatically 
transferred to consumers?
    Ms. Miller, do you have any views on that? And Mr. Duncan 
as well?
    Ms. Miller. To be totally honest, I have never thought of 
it the way that you are talking about it. Would it be passed on 
to my consumers? Yes, it definitely would. You talk about 
competition, there is not a lot around us. We are a small 
store. There are 850 people in town. We have a one-room school 
house across the road. You have to go 25 miles to Montpelier, 
you have to go 50 miles to Burlington. I have to take care of 
my customers. If I don't take care of my customers, the doors 
are going to close. I need help.
    Mr. Moore of Kansas. Mr. Duncan, do you have any thoughts?
    Mr. Duncan. Sure. Let me start with the GAO report. It is 
unfortunate in that GAO report that the staff chose to rely on 
a study that was actually a MasterCard study, rather than going 
to the Federal Reserve Bank of Australia. Because if they had 
spoken with the Federal Reserve Bank, they would have found 
that in fact there had been significant savings to consumers as 
a result of the changes in Australia.
    And in fact, I was at a conference in Chicago just 
recently, the Chicago Fed, where they talked about $1.1 billion 
in returns to consumers as a result of the changes that they 
had made there.
    In terms of the other issue, if I may just briefly--
    Mr. Moore of Kansas. Sure.
    Mr. Duncan. In terms of the honor-all-cards rule, I think 
there has been some mischaracterization of the Shuster-Welch 
bill. The honor-all-cards rule when it was first enacted was 
actually an honor-all-banks rule. What it said is if you got a 
card from Nevada or a card from Colorado or Massachusetts, they 
all have to be accepted.
    What the card companies did was they took that rule and 
they perverted it and they said it is not just honor all banks; 
it is honor all products that we put our name on. So if we 
issue a very expensive product, you have to take that. The 
Welch-Shuster bill would take it back to the original honor-
all-banks rule so cards from all banks and all credit unions 
would still be accepted.
    Mr. Moore of Kansas. Thank you, sir. I yield back.
    Mr. Green. Thank you. Mr. Cleaver is recognized for 5 
minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. Mr. Duncan, you said 
earlier, and I think several have quoted you that the debit 
card is a plastic check. And you still stick by what you said 
earlier?
    Mr. Duncan. Yes.
    Mr. Cleaver. Okay. Senator, do you agree?
    Ms. Duplessis. No. Well, I agree that it could be 
considered a plastic check, absolutely.
    Mr. Cleaver. Okay. When a check is presented by a merchant, 
either through the machine--Emanuel Cleaver has just written a 
check here for $50--they do the machine to check the balance, 
and they come back and say sorry, you are writing a check for 
$35, you only have $25 in your account, I am sorry, we can't do 
business.
    Ms. Duplessis. You bring up a really good point. That is 
called remote deposit capture, in which a merchant can take 
that check, run it through a scanner, and it talks with the 
bank to determine if funds are there.
    Mr. Cleaver. Okay.
    Ms. Duplessis. But there is a fee for that, too. That 
merchant pays a fee. You can call it an interchange fee, but 
there is a fee that merchant pays for that convenience.
    Mr. Cleaver. Right. Good. Now, but then we have a problem. 
And that is the same thing could be done with a debit card. It 
is a plastic check. But it is not. And so what the debit card 
does is create a high-interest loan. And if you are making 
loans, what is the difference between a loan shark, which is 
defined as an interest rate of between 10 and 20 percent--the 
new definition, not the Mafia and the Godfather stuff--but the 
definition of 10 to 20 percent. So if you can find out that a 
paper check has insufficient funds, couldn't you also find out 
that the debit card--
    Ms. Duplessis. You do. It is all real-time. It is all the 
same process.
    Mr. Cleaver. So explain how banks were able to end up with 
$24 billion, with a ``B,'' billion dollars in overdraft fees.
    Ms. Duplessis. That is when you use the old process of 
depositing a check. And that is an extremely great point. 
Because for that merchant, they have a couple of options. They 
can take that paper check, not pay for the service of scanning 
that check to get real-time dollars, and have those dollars 
automatically deposited into their account. They don't have the 
cost of a bounced check.
    But if they take that same check and bring it to their bank 
for processing, then they have some risk there. They have the 
risk that the check will not be honored. That is a cost to that 
merchant.
    Mr. Cleaver. So when the debit card is swiped--
    Ms. Duplessis. Real-time.
    Ms. Miller. If there is no money there, it says 
``declined.''
    Ms. Duplessis. It says ``declined.'' Same with the check. 
It is the same process, two different machines.
    Mr. Cleaver. Okay. But explain how you end up with a $24 
billion balance sheet on overdrafts with both debit cards and 
paper checks--
    Ms. Duplessis. You don't.
    Mr. Cleaver. --which is up 35 percent from last year.
    Ms. Duplessis. No, sir, you don't. Let me try and get you 
there. What is happening, when that transaction comes in, it 
depends--you have in a person's activity, you have numerous 
transactions that are posted.
    Mr. Cleaver. Okay. I don't want to learn. What I want you 
to do is tell me, how did the banks come up with $35 billion 
more than they did 2 years previous to that in overdraft fees?
    Ms. Duplessis. It wasn't based on real time authorization. 
It was not based on real time authorization, sir. If that bank 
gives you an authorization that the money is good, whether you 
do it with a check and it is scanned, or with a debit card, 
when you get an authorization the money is automatically, 
immediately--they call it presentment--taken from your account.
    So the overdrafts that banks receive, the billion dollars 
that you say that the industry has received--
    Mr. Cleaver. Twenty-four billion.
    Ms. Duplessis. But you are talking an industry, not one 
bank. The industry, that the industry has received, is not 
based on credit card or check scanning real-time transactions. 
Because the money is already accounted for.
    Mr. Green. The gentleman's time has expired. We will now 
recognize the ranking member, Mr. Hensarling, for as much of my 
time as he may consume. And I will have 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. I appreciate your 
indulgence. I just have a couple more questions. And in the 
interests of time, I am happy to have the witnesses submit 
their answers in writing.
    The question of the Australian experience has come up. It 
is the only similar legislation I have seen in a modern economy 
dealing with interchange. Mr. Duncan, apparently you take issue 
with the prevalent studies that say that when merchant fees 
dropped, they did not result in lower prices from consumers. So 
I would be interested in what studies you have, if you would 
submit them in writing, since what I have seen shows--
    Mr. Duncan. I will submit the statements of the Federal 
Reserve in fact, yes.
    Mr. Hensarling. Fine. Send that, please.
    Also, I have seen studies that show that after that 
legislation was passed, merchants began adding credit card 
surcharges to goods, increasing costs to consumers. And on the 
competition side, one of the major bank cards shut down in 
2006, lessening competition for consumers.
    Again, if you have facts or studies that are to the 
contrary, if you would submit those in writing.
    One question for you, Mr. Mierzwinski. And that is, it is 
my understanding if this legislation passes, that the usual 
contract clause that ensures that consumers have universal 
acceptance of their cards will be thrown out. And as an 
organization that ostensibly lobbies in favor of consumers, if 
you would submit an answer in writing how that benefits the 
consumer, because at the moment, it is beyond me.
    Thank you, Mr. Chairman, for your indulgence.
    Mr. Green. Thank you.
    With the remainder of my time, which is a little more than 
3 minutes, let's just start with Ms. Miller, and we will give 
each of you an opportunity to give a closing statement. I do 
ask that you be as terse as possible so that the rest of your 
colleagues will have an opportunity to respond.
    Ms. Miller, any final words that you would like to share 
with us?
    Ms. Miller. I wasn't really ready. But I guess my biggest 
thing is, please support Congressmen Welch and Shuster in this 
bill. If I can be of any more assistance to anybody, I am only 
a phone call away, an e-mail away. I want to help.
    And another thing, too, I don't know if you really 
understand this; we can't talk to our customers about this. I 
can't, according to their rules and regulations, tell my 
customers what they are paying in fees through my business. So 
I am going to go back to the store tonight, and tomorrow 
morning everybody's going to be like wow, what is up? And I 
can't talk about it. So please support their bill. Thank you.
    Mr. Green. All right. Sir?
    Mr. Caverly. To respond to that comment, my understanding 
is that Visa and MasterCard both allow the merchants to provide 
that information to their customers in terms of the fee 
structure. That can be provided by a merchant to their 
customers.
    In closing, or to wrap this up, I think Congressman Scott 
had mentioned this in his opening comments, that I think the 
key question is what would happen to the consumer? And again, I 
am here representing the 92 million--
    Mr. Green. I am going to have to ask that you wrap it up, 
because I do want to hear from the other panelists.
    Mr. Caverly. Okay. I am here representing the 92 million 
credit union members and the 178,000 members in my credit 
union. And I think ultimately, whether it is this legislation 
or other legislation that will reduce interchange fees, it is 
going to hurt the consumer.
    Mr. Green. Next, please.
    Mr. Mierzwinski. Very briefly, first, I will respond in 
detail to Mr. Hensarling's question. But I don't believe the 
honor-all-cards rule is actually meant as a consumer protection 
rule. I refer to Mr. Duncan's comments.
    Second, I strongly concur with Mr. Cleaver that we need 
overdraft protection at point of sale so that consumers can 
decline and not pay those billions of dollars in overdraft fees 
since they have the real-time solution.
    And third, I would submit the interchange market is broken 
and needs reform. But the retail market, I need to be convinced 
the retail market is broken and needs the kinds of reforms the 
banks claim it needs.
    Mr. Green. Thank you, sir. You will each have approximately 
30 seconds.
    Ms. Duplessis. Thank you. What I would like do is just ask 
that you really consider and truly understand the true 
unintended consequences that trying to regulate these fees 
could have not only on the small community banks, but also on 
the merchants themselves. I don't think they actually realize 
what those unintended consequences will be.
    Mr. Green. Sir?
    Mr. Duncan. I would first of all echo Ms. Miller's comments 
about the Welch-Shuster bill. And I would add to that just one 
point. For markets to work so that everyone benefits, we need 
two things: We need transparency and we need competition. We 
don't have either of those now. And the bill will help us 
achieve that.
    Mr. Green. Thank you very much. This panel is excused. And 
we will ask that you move away as expeditiously as possible.
    We ask that the next panel move forward and be seated. And 
we thank you for your patience. We did have a number of votes 
that interceded. So thank you very much for your patience that 
you have demonstrated.
    Thank you. We would like to welcome this, our third and 
final panel. And we are honored to have with us today the 
deputy director for national priorities for Consumer Action, 
Ms. Ruth, and I believe the last name will be ``Susswein.''
    Ms. Susswein. ``Susswein.''
    Mr. Green. ``Susswein.'' Thank you.
    We have the senior vice president and general counsel for 
ABA Card Policy Council with the American Bankers Association. 
This would be Kenneth J. Clayton.
    We have the president of the National Small Business 
Association, Todd McCracken.
    We have the senior compliance counsel with the National 
Association of Federal Credit Unions, Anthony Demangone.
    And finally, we have the manager of the Safe Credit Cards 
Project, the Pew Charitable Trusts, Mr. Nick Bourke.
    We will start with Ms. Susswein, and each of you will have 
5 minutes. And when you finish, Ms. Susswein, I will of course 
announce the next speaker.
    You may proceed. You now have 5 minutes to summarize your 
comments.

     STATEMENT OF RUTH SUSSWEIN, DEPUTY DIRECTOR, NATIONAL 
                  PRIORITIES, CONSUMER ACTION

    Ms. Susswein. Thank you, Congressman. And thank you to the 
committee for having me testify today on behalf of Consumer 
Action. I am Ruth Susswein with the nonprofit education and 
advocacy group Consumer Action. For more than 2 decades, we 
have been reporting on credit card rates and fees to track 
industry trends and assist consumers in comparing cards. We are 
one of the groups that consumers call when they have a credit 
card problem.
    I would like to express our appreciation today, first of 
all, for the chairman's leadership on consumer protection 
issues, and particularly for supporting the Consumer Financial 
Protection Agency. We are also grateful for the tenacity on 
this issue. We strongly support H.R. 3639, to establish an 
earlier effective date for the Credit CARD Act.
    We are going to focus our testimony today on the exploitive 
practices of some card issuers and how some of these practices 
have taken place since the Act was signed into law.
    We have been conducting extensive annual credit card 
surveys at Consumer Action since the mid-1980's. We survey each 
of the top credit card issuers, from banks, credit unions, and 
low rate issuers. In our 2009 survey, we discovered that 
between March and June, some major credit card issuers had 
arbitrarily increased rates, spiked fees, and hiked minimum 
payments. There appeared to be no rational reason for these 
increases, no jump in the prime, no other reason other than 
issuers making good on threats that credit would dry up and 
cardholders would see costs rise with the passage of the Credit 
CARD Act.
    A few examples: Bank of America has a Platinum Plus card 
that the purchase rate went up to 46 percent. Citi had 3 cards 
that went up 26 to 42 percent within that March to June period. 
Within 3 months, some cards went up as much as 3 percentage 
points. We have also found fees that spiked between March and 
June.
    Consumer Action also assists consumers with all sorts of 
problems. And we hear from our complaint hotline. I would like 
to give you just a brief sample of some of the things we have 
been hearing about this problem. A Chase customer for 19 years 
saw his minimum payment jump from 2 percent to 5 percent; his 
amount raised, going up from $250 a month to over $600 a month. 
He told us, ``We have excellent credit. We have done a terrific 
job managing our money during severe economic conditions.'' And 
yet this is a terrible way to treat good customers.
    A Maryland cardholder contacted us in desperation when her 
rate more than doubled. It went from 12.49 percent to a 
whopping 29.9 percent; her monthly minimum went from an 
affordable $151 a month to $471 a month. She couldn't pay it. 
When she contacted the issuer to try to arrange an affordable 
payment plan, she was turned down. And she acknowledged that 
she had been late with one payment when her due date was moved 
back a week from the 4th to the 30th. She understood being hit 
with a late fee, but not a 140 percent interest rate hike.
    We happened to intervene on that cardholder's behalf, and 
ultimately, the bank was able to help her. But not everyone is 
that fortunate. Had the Credit CARD Act been in effect already, 
her late payment would not have allowed her rate to more than 
double, and that entire ordeal could have been avoided.
    We hear from scores of cardholders who have paid on time 
each month who have seen their rates rise, often double, often 
for no reason at all. We hear from cardholders who say they 
have three and four cards where they have seen rates as much as 
double.
    One cardholder I spoke to yesterday said, ``I have done 
nothing wrong. I have lived up to my obligations, and I am 
being treated like a deadbeat. And when I call the company and 
complain, what they say is, `there is nothing we can do about 
it.'''
    Cardholders who have seen their rate go from 7.9 fixed to 
17.9 variable complain to the company and are told it is a 
business decision based upon economic factors. Factors that are 
beyond a cardholder's control, even though they are told their 
rates are based on risk-based pricing.
    If the credit card law was in effect today, issuers would 
still have the freedom to raise rates for arbitrary reasons, 
but they would not be able to apply the increase to the balance 
in most cases.
    We don't accept the notion that card issuers must find ways 
to replenish their coffers on the backs of cardholders. We 
think there is a direct link between some of the indefensible 
practices and today's high default rates.
    There is no logic in taking a customer who is responsible, 
who is meeting his monthly bills and paying interest to boot, 
and hiking rates, spiking minimum payments, and transforming 
the healthy customer into an unhealthy one. We think that 
cardholders have cried out to Congress to add fairness and 
limits to this lopsided lending system.
    Mr. Green. Ma'am, we will have to get the rest of your 
statement in the record. You will be asked some questions, and 
perhaps you will have an opportunity to expound. But we must 
move forward. Thank you so much. I am sorry.
    [The prepared statement of Ms. Susswein can be found on 
page 221 of the appendix.]
    Mr. Green. Mr. Clayton, please, you will have 5 minutes to 
summarize.

  STATEMENT OF KENNETH J. CLAYTON, SENIOR VICE PRESIDENT AND 
  GENERAL COUNSEL, ABA CARD POLICY COUNCIL, AMERICAN BANKERS 
                       ASSOCIATION (ABA)

    Mr. Clayton. Thank you, Mr. Green. Thank you for the 
opportunity to testify on H.R. 3639, a bill that would move up 
the effective date of the broad mandates of the CARD Act to 
December 1st of this year.
    Let me say at the outset that all card lenders, whether 
they are the largest financial institutions in the country or 
the smallest community banks, are working hard to implement the 
CARD Act as soon as possible. The Act requires a fundamental 
change in the credit card marketplace, with consumers provided 
greater control over the terms and use of their card. Card 
issuers recognize that Congress has spoken, and that changes 
must come in how we interact with our customers.
    However, while we understand that some members of this 
committee continue to express concern over actions taken by 
issuers in the marketplace, we believe that there are both 
strong practical and policy reasons for not adopting H.R. 3639. 
In short, we believe that its enactment will actually 
exacerbate the problems experienced by consumers, small 
businesses, and the broader economy in accessing reasonably 
priced credit.
    In my testimony today, I would like to make three basic 
points:
    First, full implementation of the provisions of the CARD 
Act is a practical impossibility. Implementation of that Act is 
an enormous task, requiring the complete reworking of internal 
operations, risk management models, funding calculations, 
employee training, and computer coding necessary to service 
hundreds of millions of accounts every day. To do this right 
requires an investment of hundreds of millions of dollars, 
thousands upon thousands of manpower hours, and perhaps, most 
importantly, sufficient time. The timeframe provided in H.R. 
3639 is inadequate for the task at hand. The Federal Reserve 
just recently issued an 800-page proposal seeking public 
comment on provisions of the CARD Act. Comments are due in mid-
November. There is not sufficient time for the Fed to review 
the comments, revise the rule to incorporate appropriate 
changes, issue a final rule before December 1st, and expect 
institutions to immediately change their systems to fully 
comply with the new rules by that December 1st date.
    It becomes even more difficult when you consider that in 
some instances, proposed rules do not yet exist, and that 
technological solutions to the various challenges posed by the 
new rules will take time to develop.
    Besides the practical hurdles of speeding up compliance, 
other negative consequences are likely. Thousands of small 
community banks that issue credit cards would be negatively 
impacted by the change. Retailers that offer private label 
cards in concert with major card issuers run the risk of system 
failures at the peak time of the holiday season. This is due to 
the inadequate time under the proposed bill to implement and 
test the systems changes required. This could mean significant 
lost sales for retailers at a time period where merchants 
typically receive 25 to 40 percent of their annual sales 
volume, not to mention the substantial customer confusion, 
anger, and loss of convenience that would be caused.
    My second point is that the industry is very sensitive to 
the concerns that you, Mr. Chairman, Congresswoman Maloney, and 
others have raised over increased rates in the marketplace. The 
CARD Act includes a provision requiring 45-day advance notice 
for any rate increase, with the right for the consumer to say 
no. That provision has already been implemented and went into 
effect on August 20, 2009, nearly 2 months ago. Thus, consumers 
are already protected in this area.
    My third and final point is this: The cumulative impact of 
six straight quarters of job losses is putting tremendous 
financial pressures on both individuals and financial 
institutions. Falling behind on debt payments is an unfortunate 
side effect of high unemployment and a frozen job market. 
Simply put, this has made for a very difficult lending 
environment, and the industry is experiencing significant 
losses. Lenders must take steps to mitigate risk, which has led 
to the price increases and credit line reductions that you have 
seen in the marketplace. To do otherwise would seriously 
compromise our ability to make loans in the future.
    The requirements of the CARD Act that limit prudent risk 
management merely exacerbates the challenges presented by the 
economy. Moving up the effective date of that Act would 
increase the likelihood of systems failures, expensive 
litigation, and underwriting problems, adding to the pressure 
to increase rates and cut available credit. We believe that 
consumers, small businesses, and the U.S. economy will suffer 
if such a result comes to pass. Thank you for considering our 
views.
    [The prepared statement of Mr. Clayton can be found on page 
120 of the appendix.]
    Mr. Green. Thank you.
    Mr. McCracken, you are recognized for 5 minutes, sir.

STATEMENT OF TODD McCRACKEN, PRESIDENT, NATIONAL SMALL BUSINESS 
                       ASSOCIATION (NSBA)

    Mr. McCracken. Thank you very much. I appreciate the 
opportunity to be here today. Again, my name is Todd McCracken. 
I am the president of the National Small Business Association, 
America's oldest small business advocacy organization.
    When I testified before this committee's Subcommittee on 
Financial Institutions and Consumer Credit in March, I spoke at 
some length to the difficulties America's small business owners 
were encountering in their attempts to access credit. 
Unfortunately, the situation is little improved.
    In its July 2009 quarterly Senior Loan Officer Opinion 
Survey, the U.S. Federal Reserve reported that over the 
previous 3 months, domestic banks continued to tighten 
standards and terms on all major types of loans to businesses 
and households. Banks also reported that they expected their 
lending standards across all loan categories to remain tighter 
than their average levels over the past decade until at least 
the second half of 2010.
    Credit cards are now the most common source of financing 
for America's small business owners. According to our 2008 
nationwide survey of small- and mid-sized businesses, 44 
percent of small businesses identified credit cards as a source 
of financing that their company has used in the previous 12 
months, more than any other source of financing, including 
business earnings.
    The results of more recent internal surveys have been even 
more dramatic. When asked what types of financing their firms 
have used in the previous 12 months, 59 percent of the small 
businesses in 2009 identified credit cards. In 1993, only 16 
percent of small business owners identified credit cards as a 
source of funding. And over a third of the respondents in the 
credit card survey also reported that a quarter or more of 
their overall debt financing was comprised of credit card debt.
    In 2009, small business owners have experienced a litany of 
abuses and deteriorating credit terms unrelated to their past 
performances. Nearly 80 percent of the small business 
respondents to the credit card survey said that the terms of 
their cards have gotten worse in the last 5 years. Almost half 
of the respondents reported that they had encountered a credit 
card due date that seemed to change randomly. And 57 percent 
reported that they had received a bill too close to the due 
date to mail their payment in on time.
    Furthermore, a quarter of the respondents reported that 
their interest rates increased between February and April 2009, 
while a third reported their credit limit had been reduced in 
the previous 6 months.
    According to a recent article in the Wall Street Journal, 
credit card lines have been cut by over $1.25 trillion in the 
last 2 years, and 10 percent of all credit card accounts have 
been canceled. The same article asserts that lenders began 
reducing available credit by ZIP Code in the fourth quarter of 
2007, and have been cutting inactive accounts, whether or not 
the customer viewed the account as a liquidity vehicle for the 
past 4 quarters.
    While NSBA supports the expedited enactment of the 
protections contained in the Credit CARD Act, it also urges 
Congress and this committee to address two additional aspects 
of the credit card industry that urgently need reform. One is 
the absence of explicit protections for small business cards; 
and two is the secretive and uncompetitive interchange system.
    The largest loophole, we believe, in the Credit CARD Act 
was the absence of the explicit protection for small business 
owners who use their cards for business purposes. Since the 
legislation amended the Truth in Lending Act, which, except for 
a few provisions, does not apply to business cards, its 
protections were limited to consumer credit cards. Although the 
credit cards of many, if not most, small business owners are 
based on the individual owner's personal credit history, it is 
conceivable that issuers could legally consider them exempt 
from the law's vital protections. Although in the past, issuers 
appear largely to have kept most of their cards in compliance 
with TILA, there is no guarantee this convention will continue, 
especially when one considers that its basis appears to have 
been practicality and not legal obligation. Since issuers were 
able to subject consumer cards to the most egregious of 
practices, there was little incentive to distinguish between 
consumer and small business cards.
    An unintended consequence of the Credit CARD Act is that it 
could provide just such an incentive. Thankfully, legislation 
has been introduced that would correct this oversight and 
extend equal protection to the cards used by small business 
owners with 50 employees or fewer.
    The Small Business Credit CARD Act of 2009 also contains an 
opt-out provision so that small business owners who do not want 
their cards protected in such a manner can choose to keep any 
current agreements.
    H.R. 3457, this was the bill, is supported by a range of 
organizations from consumer groups to small business groups, 
and I respectfully request this committee consider this 
bipartisan, commonsense legislation as soon as possible.
    I am going to submit my statement on interchange fees for 
the record--because I think you have dealt with that to a great 
extent today--and conclude.
    If millions of small firms are going to be created during 
this recession, as they have been in previous recessions and 
economic downturns, then they are largely going to be financed 
with credit cards, given the current lending environment. 
Although credit cards are an inherently expensive and volatile 
source of financing for many entrepreneurs, they are also 
indispensable.
    Congress can and must ensure, however, that they are not 
allowed to function simply as a mechanism with which to siphon 
capital from the backbone of the economy to the top 10 U.S. 
banks.
    [The prepared statement of Mr. McCracken can be found on 
page 194 of the appendix.]
    Mr. Green. Thank you, sir.
    Mr. Demangone is now recognized for 5 minutes.

    STATEMENT OF ANTHONY DEMANGONE, DIRECTOR OF REGULATORY 
COMPLIANCE/SENIOR COMPLIANCE COUNSEL, THE NATIONAL ASSOCIATION 
                OF FEDERAL CREDIT UNIONS (NAFCU)

    Mr. Demangone. Good afternoon. My name is Anthony 
Demangone, and I am the director of regulatory compliance at 
NAFCU and its senior compliance counsel. As the committee is 
well aware, there have been many recent changes to the Truth in 
Lending Act and Regulation Z over the past year-and-a-half. The 
Federal Reserve Board has taken numerous actions regarding 
credit card regulations, real estate lending, and student 
lending, among others.
    Most recently, the Federal Reserve Board announced an 841-
page proposal to implement provisions of the Credit CARD Act, 
set to go into effect February 22nd of next year.
    In short, America's credit unions have been asked to handle 
a seemingly endless number of changes to the lending law. I 
fear these changes are being adopted with only larger 
commercial banks in mind.
    I assure you, however, the resources of the credit union 
industry and other small institutions are being stretched to 
the limit. This challenge is further exacerbated by the short 
compliance deadlines included in the Credit CARD Act, deadlines 
made even shorter by the legislation this committee is 
examining today.
    It is with this in mind that NAFCU strongly opposes the 
Expedited CARD Reform for Consumers Act. NAFCU understands that 
the Credit CARD Act was a response to a legitimate need to rein 
in unscrupulous credit card practices. Unfortunately, the 
measures targeting unscrupulous lenders created operational 
burdens for an entire industry. Simply put, credit unions will 
not be able to bring their systems into entire compliance by 
December 1st of this year.
    The best argument against a shorter effective date is the 
unintended consequences of the 21-day provision included in the 
Credit CARD Act. This provision was intended to require lenders 
to send out credit card statements 21 days in advance of the 
payment due date for their credit card account. Unfortunately, 
the provision was drafted so that it applied to all open-ended 
consumer plans. This seemingly small issue proved to be a very 
substantial and costly problem for credit unions. It will 
likely lead to the end of credit unions issuing consolidated 
statements, the elimination of the ability to pick due dates, 
and weekly and biweekly payment dates will cease to exist for 
open-ended lending.
    Simply put, the 21-day issue is the largest single 
compliance burden the credit union industry has faced in the 
last decade. More importantly, it is an issue that could have 
been resolved easily if not for the fact that the effective 
date followed so quickly after the bill was signed into law.
    When Congress passes legislation, it dictates what must be 
done. Federal agencies and private industry, however, are 
responsible for determining how it gets done. Simply put, there 
needs to be sufficient time between when Congress decides what 
must be done and when industry is required to have their 
operational systems in place to accomplish that end.
    Equally important is the fact that it would be virtually 
impossible for the Federal Reserve to promulgate regulations to 
meet the December 1st effective date. Moreover, even if the Fed 
could act in time, I assure you industry could not. We are 
currently digesting the 841-page proposal the Fed recently 
announced, which will implement the provisions set to go into 
effect February 22nd of next year. Many institutions will have 
difficulty modifying their operations to meet that date, much 
less a December 1st deadline. Given that compliance is 
factually impossible, there seems little reason to move the 
date forward.
    Taken together, the CARD Act and the subsequent changes to 
Regulation Z will create significant changes in the credit card 
industry. It is customary, natural, and necessary for lenders 
to reconsider their own business plan and practices in light of 
such dramatic changes. Indeed, it would be irresponsible for 
management to carry on current practices without considering 
the long-term effect these changes will have on the market. Yet 
a shorter effective date will force many lenders to ignore or 
discount long-term planning for the simple reason that they 
must devote all of their time and energy to compliance.
    The bill's provisions regarding increasing interest rates 
and changing terms makes sense when considered individually. 
However, they will dramatically change the way institutions 
conduct their conduct. An artificially short effective date, 
however, handcuffs senior management, and will make long-term 
strategic planning more difficult.
    While we understand the committee's concerns with the 
abuses in the credit card industry, a December 1st effective 
date will do little to alleviate the problem. At the same time, 
an earlier effective date will exacerbate our operational 
problems, likely create new problems, and increase the overall 
cost of compliance for all lenders.
    Thank you for the opportunity to provide our views on this 
important topic, and I am pleased to respond to any questions.
    [The prepared statement of Mr. Demangone can be found on 
page 129 of the appendix.]
    Mr. Green. Thank you, sir.
    Mr. Bourke, 5 minutes.

 STATEMENT OF NICK BOURKE, MANAGER, SAFE CREDIT CARDS PROJECT, 
                   THE PEW CHARITABLE TRUSTS

    Mr. Bourke. Thank you, Mr. Chairman. My name is Nick 
Bourke, and I am the manager of the Safe Credit Cards Project 
at the Pew Charitable Trusts. We are a nonprofit, nonpartisan 
organization dedicated to fact-based solutions to important 
public policy challenges, including safe and transparent credit 
cards.
    In 2007, my project began studying the perceived dangers in 
credit cards. And one of the things that we did is we reached 
out to the industry, and we tried to find some voluntary 
market-based solutions, and we tried to find other solutions, 
including doing independent research. I am going to talk about 
some of our research here today. More results will be published 
later this month.
    In 2008, the Federal Reserve made the legal determination 
that certain practices are unfair and deceptive. And one of the 
questions we had was, how widespread are these practices? So we 
looked at the application disclosures of all consumer credit 
cards offered online from the largest 12 issuers. This is a 
group that accounts for approximately 90 percent of the 
outstanding balances.
    We did this research last December and we did it again this 
July. And our July study covered more than 350 credit cards 
from these issuers. We found several things, including that 
median advertised rates had gone up significantly, 13 to 20 
percent, depending upon a consumer's credit profile. But that 
is not all.
    The first point I would like to make today is that since 
the passage of the Credit CARD Act, the situation has not 
become better for consumers. For example, 97.7 percent of the 
cards that we reviewed included anytime/any-reason change in 
terms and policies, which allowed the issuer to change the 
agreements, including raise interest rates on outstanding 
balances. That is up from 93 percent in December.
    Overall, more than 90 percent of the cards that we looked 
at contained the most troublesome, unfair, and deceptive 
practices in the Federal Reserve's review, low to high 
application of payments, so-called hair-trigger penalty 
repricing, and so on.
    None, not one of the cards that we looked at would have met 
the Federal Reserve's fairness threshold, let alone met the 
Credit CARD Act. In fact, we saw some evidence that some 
issuers were moving in the opposite direction.
    My second point is while issuers wait to remove these 
unfair and deceptive practices, or to implement the Credit CARD 
Act, American families are at risk of significant harm. I have 
heard a lot of concern in this chamber just today, asking what 
is the impact on consumers and how can they benefit?
    Well, let's look at two of these practices. Anytime/any-
reason changes in terms and penalty interest rate increases on 
outstanding balances: In our March 2009 report, we discussed 
how just these two practices cost consumers at least $10 
billion in a 1-year period. That is more than $800 million per 
month. So it would seem that time is against consumers in this 
situation.
    What does it mean to an individual? Well, let's assume that 
you have a $3,000 balance, a relatively modest balance. If an 
issuer decides to raise your rate by 5 percentage points, that 
is about $150 a year. But if they decide to raise your interest 
rate by about 15 percentage points, that is $450 per year. And 
15-percentage point increases are all too common based on our 
research. And your monthly minimum payment is going to swell 
dramatically.
    So in conclusion, our research supports accelerating the 
consumer protections in the Credit CARD Act. The Act will 
strengthen the agreements between cardholders and issuers, and 
it is designed to enhance transparency and fair dealing, which 
should make the market more competitive over time.
    Now, I do want to take this opportunity to recognize that 
the long-term benefits of the Credit CARD Act will depend in 
large part on what the Federal Reserve does next, especially in 
its rulemaking, to prevent unreasonable or disproportionate 
penalty fees and charges.
    Whatever the effective date of the Credit CARD Act, it will 
be important to ensure that the Federal Reserve takes the time 
and the effort to enact strong consumer protections as well. 
And we have made some suggestions in that regard. Thank you 
very much.
    [The prepared statement of Mr. Bourke can be found on page 
59 of the appendix.]
    Mr. Green. Thank you for the additional 50 seconds that you 
have yielded.
    Mr. Bourke. My pleasure.
    Mr. Green. The gentleman, Mr. Watt, is recognized for 5 
minutes.
    Mr. Watt. I was kind of hoping you would go first, Mr. 
Chairman, so I could gather my thoughts.
    First of all, I apologize for missing the first three 
testimonies. I was trying to get here because I always like to 
hear the testimony more than I like to hear the questions, 
really. It is generally more helpful.
    I assume, Mr. Clayton, you disagree vigorously with what 
Mr. Bourke testified. Do you?
    Mr. Clayton. It depends on which part you are talking 
about.
    Mr. Watt. The part where he thinks either that these 
practices have gotten worse, or that we need to expedite the 
implementation of--
    Mr. Clayton. We disagree with both.
    Mr. Watt. Okay. And why?
    Mr. Clayton. In terms of expediting, as I mentioned in my 
opening statement--and I apologize, and I will be glad to chat 
with you about it--it is impossible for us to comply with the 
moving up of the effective date of the provisions of the Act. 
This is a massive rewrite of the way we do business. We 
understand that Congress has spoken, and we understand that we 
have to change our ways.
    Mr. Watt. If he is right that you are changing the terms 
and moving the target on your own, is it less difficult to do 
that than to change the targets in a direction that complies 
with the new statutory provisions that are coming online?
    Mr. Clayton. Mr. Watt, we disagree with the statement 
that--
    Mr. Watt. Okay. Well, maybe I should have gotten you to 
address that part of it first, then.
    Mr. Clayton. Can I say quickly that Congress has already 
acted on the issue of interest rate increases and basically 
said, as of August 20th of this year, that consumers have to 
get 45 days advance notice, and they can say no to any rate 
increases. So we have heard the concerns about increased rates. 
The Congress has spoken and said you cannot do that, and they 
have given an implementation/transition period. And they have 
said if someone in the marketplace increases the rate, as 
alleged, the consumer can say no, they can close their account, 
and they can pay back their balance in a reasonable amount of 
time. So the problem that is being alleged isn't there anymore.
    Are interest rates being increased? Yes. It is broadly a 
function of the marketplace and the economy and the significant 
number of unemployed people who are out there, and the fact 
that a lot of people aren't paying back their bills, and the 
only way we can loan in the future is to have people pay back 
their bills, and we have to deal with that. And so that is how 
the market is reacting.
    Mr. Watt. I assume that nobody on this panel is dealing 
with interchange fees. Has that issue come up on this panel, or 
that was all of the last panel dealing with that? Nobody here 
is dealing with that? Okay. I won't ask any questions about it. 
We beat that horse to death in the last panel.
    Okay. I am sure I could be more constructive if I had heard 
the testimony or if I had read the testimony, either one, both 
of which I confess to not having done. So I think, 
constructively, I will just yield back to the gentleman who 
heard the testimony. I will yield him the balance of my time.
    Mr. Green. Your time will be put to good use. Thank you, 
Mr. Chairman.
    We will now hear from Mr. Cleaver for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    I do want to bring up interchange fees because I think 
there is a connection. I am wondering about the coincidence 
that the interchange fees are rising so dramatically now at the 
same time that we are closing in on the deadline for the new 
credit card law coming into effect. I am sure you were here 
earlier, so you heard the exchange with the representative from 
the bank. I talked about overdraft fees reaching $24 billion, 
which is up 35 percent from the previous year.
    Are all of you saying that is just coincidental? Will 
anybody say it is coincidental?
    Mr. McCracken. I am not sure there is a strong connection. 
We think the interchange fees need to be looked at, and it does 
create a difficult situation for a lot of small companies, 
especially small retailers. They can't control the prices, they 
are deeply frustrated by it, and we think the system needs to 
change.
    I don't see a significant connection because this has been 
building for some time now with interchange fees. I don't see 
something that has happened in the last 6 months.
    Mr. Cleaver. Well, I am just basing this on the FDIC study. 
I didn't just pull that figure up. It was a 35 percent 
increase?
    Mr. McCracken. Well, if you are talking about a 35 percent 
increase in--one of the things that you have seen happening is 
more people are using cards increasingly--
    Mr. Cleaver. Debit cards?
    Mr. McCracken. Debit cards, and we have seen, of course, 
the trend in the increasing use of credit cards for a long 
time. It has been a steady rise. But you have mentioned and all 
of us mentioned before the increase in overdraft fees. And that 
I think also is directly tied to the increasing use of debit 
cards over credit cards.
    Mr. Clayton. Mr. Cleaver, can I jump in for a second?
    Mr. Cleaver. Yes.
    Mr. Clayton. I want to be clear here. Interchange fees are 
not going up. The aggregate amount of fees taken in because of 
interchange has increased because--
    Mr. Cleaver. I understand that. It is about 2 percent, 175 
of which probably is the interchange fee.
    Mr. Clayton. That is credit cards. For debit cards, it is 
below 1 percent. That is different from overdrafts. I just 
wanted to be clear.
    Mr. Cleaver. I understand that. What I want to do is make 
sure that I am wrong, that there is no coincidence.
    Mr. Demangone. Sir, speaking on behalf of Federal credit 
unions, I can say there is no correlation to any increases in 
fee income with regard to overdraft protection and the changes 
that were in the Credit CARD Act. Those are separate.
    I would like to point out that our entire industry has been 
dealing with the overdraft issue. The Federal Reserve and the 
NCUA were working on this as far back as 2005, giving best 
practices on ways to better implement these plans more 
transparently. And the Federal Reserve has a proposal out there 
which will take effect sometime in 2010 which will greatly give 
consumers the ability to either opt in or opt out of overdraft 
protection programs. So the regulators have really taken this 
issue up strongly. And I think if things would just be allowed 
to play out as they are, I think you will see consumers are 
already on track to gain a lot of new benefits and rights in 
the coming year just from the existing regulations that are 
about to be implemented.
    Mr. Cleaver. Okay. Since you brought up the issue of 
regulations, I think all of you would agree I think that--or 
maybe I should ask whether or not you think you should be able 
to impose on consumers rules that are unfair or deceptive or 
anticompetitive.
    Mr. Demangone. I can obviously say, no, we don't think any 
unfair, deceptive rules should be placed on members. As member-
owned financial institutions, a lot of the problems that you 
have heard, people keep talking about the top 10 credit card 
lenders, I guarantee you there is not a Federal Credit Union 
that is one of them. We have a usury ceiling of 18 percent. We 
have a prohibition against prepayment penalties. So it is 
frustrating for us as an industry to sometimes be painted with 
a broad brush. People point to the big credit card lenders--
    Mr. Cleaver. I don't want to do that. So everybody would 
agree that you do not want the ability to impose rules that are 
unfair or deceptive or anticompetitive; everybody agrees? Okay. 
So then why won't you support giving a regulatory body the 
authority to review rules that you already comply with?
    Mr. Demangone. Ultimately, I think what it is going to do 
is it is like adding another referee to the football game. We 
are going to have to pay for that referee's salaries. 
Ultimately, it is going to increase compliance costs for each 
Federal credit union. And who bears those costs ultimately? The 
member owners.
    The Federal Reserve and NCUA we think already do a 
commendable job of enforcing actions. Are they perfect? No. And 
I think you will see them redouble their efforts in the years 
and months moving forward, but just to create a brand new 
agency, thinking that just another agency is going to protect 
consumers, I think there is a risk that it will be completely 
the opposite. Federal credit unions may move out of--
    Mr. Cleaver. I know. But you already comply with the things 
that would be regulated.
    Mr. Demangone. But if it applies to credit unions and there 
is another layer of examinations, that will greatly increase 
their compliance costs. It will be another examination that we 
have to prepare for, deal with, and that ultimately costs 
dollars in personnel and lost time, and ultimately member 
owners will bear those costs.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Green. Ms. Susswein, you were interrupted, and I 
apologized to you, and you haven't had an opportunity to speak, 
so I would like to accord you some of my time. I have about 5 
minutes, so I would like to accord you some of my time to 
finish your statement.
    If you could, please leave just enough for me to ask one 
question, please.
    Ms. Susswein. Thank you, and thank you for your time.
    I really just wanted to make a couple of final points. One 
was that we think that, frankly, lenders have taken advantage 
of Congress' generous timeframe in which to implement the law. 
Lawmakers accommodated card issuers who claimed that they 
needed time to reprogram computer systems. And we understand it 
is complex, but issuers have used the time to use consumers as 
pawns in their game to maximize profits.
    If card issuers allocate payments right now from the lowest 
rate to the highest rate, my question is, why do they need 9 
months to reverse that practice? That is a huge benefit to 
consumers, and one that wouldn't seem to take so long.
    There are elements to this legislation, as we understand 
it, that won't really be put into practice actually until 
August, 15 months after enactment. That seems to be an enormous 
amount of time. And we see the kind of damage that has been 
inflicted that I discussed earlier in my testimony to 
consumers.
    The main point we want to say is that we strongly support 
implementation of this credit card law as soon as possible. 
December 1st sounds just fine to us. Consumers need the 
assistance now. Consumers have cried out to Congress over time 
saying that what we need is help in limiting some of these 
practices and curbing some of these abusive tactics. Congress 
heard us and enacted the Credit CARD Act, and we feel that it 
is time to move it up and to be able to take advantage of those 
protections.
    Lastly, I just want to point out that while Mr. Clayton may 
feel that the problem is solved, from a consumer's perspective, 
having an opt-out is an excellent tool and we are very pleased 
to have it. But if we were all to opt out of every card we have 
because of its abusive practices, we wouldn't have any credit 
as consumers, and companies would be out of business because 
they wouldn't have anyone to lend to.
    Mr. Green. Thank you.
    Mr. Demangone, you indicated by way of gesture that you 
would like to respond to that, very briefly.
    Mr. Demangone. Well, the issue of how you process payments 
is not all that complicated, and it is something that could be 
done rather quickly, but I would say that is probably one of 
2,000 issues that lenders need to deal with within the Credit 
CARD Act and subsequent regulations. It is kind of a death by a 
thousand blows.
    Fee structuring and disclosures need to be changed, 
periodic statements need to be reworked. There are so many 
operational issues that credit unions need to rely on third 
parties. Those third parties have indicated to us, the 
individuals who would be responsible for doing this, that they 
can't actually make the operational changes necessary just for 
the periodic statements.
    Just yesterday, I spent literally 3\1/2\ hours with a 
credit union dealing with their rate and fee schedule trying to 
interpret 2 sections of the HOEPA rules which became effective 
October 1st. Every aspect of lending in a financial institution 
is being amended right now, so they need all the time they can 
to comply with RESPA, Truth in Lending, HOEPA, MDIA, all those 
requirements that are coming together all at once.
    Mr. Green. Mr. Bourke, you have indicated by way of gesture 
that you would like to respond. As briefly as possible, please.
    Mr. Bourke. Thank you, Mr. Chairman.
    The low to high application of payments rule is one of the 
biggest aspects of this bill in terms of what it will save 
consumers. I would argue that probably the biggest aspect of 
this bill, the most important one for consumers, is stopping 
the practice of increasing interest rates on outstanding 
balances. And even though we do have new disclosure rules and 
right-to-cancel rules in place as of August, the core of the 
bill, the part that prevents issuers from raising interest 
rates on outstanding balances and really giving the consumers 
the benefit of the bargain that they already made isn't going 
to take effect until February. And between those two issues, 
outstanding balances and application of payments, those are 
probably the biggest money-saving components for consumers.
    Mr. Green. Thank you. My question, quickly, will be a 
follow-up on what you said, Mr. Bourke, and follow-up to what 
Mr. Cleaver broached, and it is, are you convinced that all of 
this is coincidental with reference to the interest rate 
question that you just raised? Is it coincidental? That was the 
essence of what Mr. Cleaver was asking. If you think that it is 
coincidental, kindly extend a hand into the air so that I may 
see--
    Mr. Bourke. I am sorry?
    Mr. Green. If you think the raising of the interest rates 
is coincidental, kindly raise a hand into the air.
    Mr. Clayton. I know I am not allowed to rephrase the 
question--
    Mr. Green. My time is up, but I would like to at least get 
the answer, if you would. If it is coincidental that interest 
rates going up at this time, to the extent that they have, it 
just happens to work this way, it has nothing to do with the 
fact that there are some rules that will be taking effect later 
on in the year, in fact, that would be February 22, 2010. 
Hands, please.
    If not, I will indicate for the record that everyone on the 
panel thinks that it is not coincidental. We do have one.
    Mr. Clayton. Mr. Green, I would like to add something into 
an explanation to that question, if you would like.
    Mr. Green. What I will have to ask you to do is submit it 
for the record in writing if you would.
    Our time has expired. And the Chair will note that some 
members may have additional questions for the panel, this panel 
as well as the others, which may be submitted in writing. 
Without objection, the hearing record will remain open for 30 
days for members to submit written questions to these witnesses 
and to place their responses in the record.
    The hearing is now adjourned.
    [Whereupon, at 1:45 p.m., the hearing was adjourned.]



                            A P P E N D I X



                            October 8, 2009


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